10-K 1 dps-10kx123113.htm FORM 10-K DPS-10K-12.31.13

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
 Form 10-K
R
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2013
or
£
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from          to          
 Commission file number 001-33829
(Exact name of Registrant as specified in its charter)
Delaware
 
98-0517725
(State or other jurisdiction of
 
(I.R.S. employer
incorporation or organization)
 
identification number)
 
 
 
5301 Legacy Drive, Plano, Texas
 
75024
(Address of principal executive offices)
 
(Zip code)
 Registrant's telephone number, including area code:
(972) 673-7000
 Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Name of Each Exchange on Which Registered
COMMON STOCK, $0.01 PAR VALUE
 
NEW YORK STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act: None
 Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes R     No o
 Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o     No R
 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes R     No o
 Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes R     No o
 Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o     
 Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Securities Exchange Act of 1934.
Large Accelerated Filer R
Accelerated Filer o
Non-Accelerated Filer o
Smaller Reporting Company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).  Yes o     No R
 The aggregate market value of the common equity held by non-affiliates of the registrant (assuming for these purposes, but without conceding, that all executive officers and directors are "affiliates" of the registrant) as of June 30, 2013, the last business day of the registrant's most recently completed second fiscal quarter, was $9,360,953,662 (based on the closing sale price of the registrant's common stock on that date as reported on the New York Stock Exchange).
 As of February 14, 2014, there were 197,274,122 shares of the registrant's common stock, par value $0.01 per share, outstanding.
 DOCUMENTS INCORPORATED BY REFERENCE
 Portions of the registrant's definitive proxy statement to be filed with the Securities and Exchange Commission in connection with the registrant's Annual Meeting of Stockholders to be held on May 15, 2014 are incorporated by reference in Part III.
 



DR PEPPER SNAPPLE GROUP, INC.
FORM 10-K
For the Year Ended December 31, 2013

 
 
Page
 
 
Item 10.
Directors, Executive Officers of the Registrant and Corporate Governance
 
Item 11.
Executive Compensation
 
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
Item 13.
Certain Relationships and Related Transactions and Director Independence
 
Item 14.
Principal Accounting Fees and Services
 
 
 
 
 
 


ii


SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements including, in particular, statements about future events, future financial performance including earnings estimates, plans, strategies, expectations, prospects, competitive environment, regulation 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 Annual Report on Form 10-K. 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, as well as a variety of other risks and uncertainties and other factors, 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.
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 Annual Report on Form 10-K, except to the extent required by applicable securities laws. All of the forward-looking statements are qualified in their entirety by reference to the factors discussed in Item 1A, "Risk Factors" under "Risks Related to Our Business" and elsewhere in this Annual Report on Form 10-K. These risk factors may not be exhaustive as we operate in a continually changing business environment with new risks emerging from time to time that we are unable to predict or that we currently do not expect to have a material adverse effect on our business. You should carefully read this report in its entirety as it contains important information about our business and the risks we face.
Our forward-looking statements are subject to risks and uncertainties, including:
changes in consumer preferences, trends and health concerns;
the impact of new or proposed beverage taxes or regulations on our business;
the highly competitive markets in which we operate and our ability to compete with companies that have significant financial resources;
maintaining our relationships with our large retail customers;
dependence on third party bottling and distribution companies;
recession, financial and credit market disruptions and other economic conditions;
increases in the cost of raw materials and energy used in our business;
increases in the cost of employee benefits and withdrawal liabilities associated with multi-employer plans;
future impairment of our goodwill and other intangible assets;
the need to service our debt;
litigation claims or legal proceedings against us;
shortages of materials used in our business;
substantial disruption at our manufacturing or distribution facilities;
failure to comply with governmental regulations in the countries in which we operate;
weather, climate changes and the availability of water; 
disruptions to our information systems and third-party service providers;
our products meeting health and safety standards or contamination of our products;
fluctuations in our tax obligations;
strikes or work stoppages;
infringement of our intellectual property rights by third parties, intellectual property claims against us or adverse events regarding licensed intellectual property;
the need for substantial investment and restructuring at our manufacturing, distribution and other facilities;
maintaining our relationships with our allied brand owners;
our ability to retain or recruit qualified personnel;
changes in accounting standards; and
other factors discussed in Item 1A, "Risk Factors" under "Risks Related to Our Business" and elsewhere in this Annual Report on Form 10-K.


iii


PART I

ITEM 1. BUSINESS
OUR COMPANY
Dr Pepper Snapple Group, Inc. is a leading integrated brand owner, manufacturer and distributor of non-alcoholic beverages in the United States ("U.S."), Canada and Mexico with a diverse portfolio of flavored (non-cola) carbonated soft drinks ("CSDs") and non-carbonated beverages ("NCBs"), including ready-to-drink teas, juices, juice drinks and mixers. We have some of the most recognized beverage brands in North America, with significant consumer awareness levels and long histories that evoke strong emotional connections with consumers. References in this Annual Report on Form 10-K to "we", "our", "us", "DPS" or "the Company" refer to Dr Pepper Snapple Group, Inc. and its subsidiaries, unless the context requires otherwise.
The following provides highlights about our company:
#1 flavored CSD company in the U.S.
Approximately 83% of our volume from brands that are either #1 or #2 in their category
#3 North American liquid refreshment beverage ("LRB") business
$6.0 billion of net sales in 2013 from the U.S. (88%), Canada (4%) and Mexico and the Caribbean (8%)
History of Our Business
We have built our business over the last three decades through a series of strategic acquisitions. In the 1980's through the mid-1990's, we began building on our then-existing Schweppes business by adding brands such as Mott's, Canada Dry and A&W and a license for Sunkist soda. We also acquired the Peñafiel business in Mexico. In 1995, we acquired Dr Pepper/Seven Up, Inc., having previously made minority investments in the company. In 1999, we acquired a 40% interest in Dr Pepper/Seven Up Bottling Group, Inc., ("DPSUBG"), which was then our largest independent bottler, and increased our interest to 45% in 2005. In 2000, we acquired Snapple and other brands, significantly increasing our share of the U.S. NCB market segment. In 2003, we created Cadbury Schweppes Americas Beverages by integrating the way we managed our four North American businesses (Mott's, Snapple, Dr Pepper/Seven Up and Mexico). During 2006 and 2007, we acquired the remaining 55% of DPSUBG and several smaller bottlers and integrated them into our Packaged Beverages segment, thereby expanding our geographic coverage.
We were incorporated in Delaware on October 24, 2007. In 2008, Cadbury Schweppes plc ("Cadbury Schweppes") separated its beverage business in the U.S., Canada, Mexico and the Caribbean (the "Americas Beverages business") from its global confectionery business by contributing the subsidiaries that operated its Americas Beverages business to us.
PRODUCTS AND DISTRIBUTION
We are a leading integrated brand owner, manufacturer and distributor of non-alcoholic beverages in the U.S, Mexico and Canada, and we also distribute our products in the Caribbean. In 2013, 88% of our net sales were generated in the U.S., 4% in Canada and 8% in Mexico and the Caribbean. We sold 1.5 billion equivalent 288 fluid ounce cases in 2013. The highlights about our significant brands are as follows:
CSDs
 
 
 
 
 
 #1 in its flavor category and #2 overall flavored CSD in the U.S.
Distinguished by its unique blend of 23 flavors and loyal consumer following
Flavors include regular, diet, cherry and Dr Pepper TEN
Oldest major soft drink in the U.S., introduced in 1885

1


Our Core 4 brands
 
 
 
 
   
#1 ginger ale in the U.S. and Canada, which includes regular, diet and TEN
Brand also includes club soda, tonic, sparkling seltzer water and other mixers
Created in Toronto, Canada in 1904 and introduced in the U.S. in 1919
 
 
                            
#2 lemon-lime CSD in the U.S.
Flavors include regular, diet, cherry and 7UP TEN
The original "Un-Cola," created in 1929
 
 
               
#1 root beer in the U.S.
Flavors include regular, diet, cream soda and A&W TEN
A classic all-American beverage first sold at a veteran's parade in 1919
 
 
             
#1 orange CSD in the U.S.
Flavors include orange, strawberry, grape, diet, Sunkist TEN and other fruits
Licensed to us as a CSD by the Sunkist Growers Association since 1986
 
 

Other CSD brands
 
 
 
 
    
#1 grapefruit CSD in the U.S. and a leading grapefruit CSD in Mexico
Founded in 1938
 
 
 
 
                        

#3 orange CSD in the U.S.
Flavors include orange, diet and other fruits
Brand began as the all-natural orange flavor drink in 1906
 
 
                     
#1 carbonated mineral water brand in Mexico
Brand includes Flavors, Twist, Orangeade and Lemonade
Mexico's oldest mineral water
 
 

2


          
#2 ginger ale in the U.S. and Canada
Brand includes club soda, tonic, sparkling seltzer water and other mixers
First carbonated beverage in the world, invented in 1783
 
 
                         
Royal Crown Cola originated in Columbus, Georgia in 1905
Flavors include regular, diet, cherry and RC TEN
 
 
 
 
                                  
#2 citrus CSD in the U.S.
Flavors include regular, diet and cherry lemon
Debuted in 1951
Launched as a national brand in 2011
               
NCBs
 
 
 
 
 
A leading ready-to-drink tea in the U.S.
A full range of tea products including premium (regular and diet) and value teas
Brand also includes premium juices and juice drinks
Founded in Brooklyn, New York in 1972
#1 branded shelf-stable fruit punch brand in the U.S.
Brand includes a variety of fruit flavored and reduced calorie juice drinks
Developed originally as an ice cream topping known as "Leo's Hawaiian Punch" in 1934
 
 
#1 branded apple juice and #1 apple sauce brand in the U.S.
Juice products include apple and other fruit juices and Mott's for Tots
Apple sauce products include regular, unsweetened and flavored
Brand began as a line of apple cider and vinegar offerings in 1842
A leading spicy tomato juice brand in the U.S., Canada and Mexico
Key ingredient in Canada's popular cocktail, the Bloody Caesar, and mixed with beer in Mexico
Brand includes seafood blend and chamoy
Created in 1969
              
Brand of water which includes Frutal and Figura
Created in 1993 in Guadalajara, Mexico
 
 
 
 

3


  
#1 portfolio of mixer brands in the U.S.
#1 Bloody Mary brand (Mr & Mrs T) in the U.S.
Leading mixers (Margaritaville and Rose's) in their flavor categories
 
 
_______________________________________________________
The market and industry data in this Annual Report on Form 10-K is from independent industry sources, including The Nielsen Company ("Nielsen") and Beverage Digest. See "Market and Industry Data" below for further information.
All information regarding our brand market positions in the U.S. is from Nielsen and is based on retail dollar sales in 2013.
The Sunkist soda logo is a registered trademark of Sunkist Growers, Inc. The Rose's logo is a registered trademark of Cadbury Ireland Limited, which was acquired by Mondelēz International, Inc. ("Mondelēz") (formerly known as Kraft Foods, Inc.) on February 2, 2010. The Margaritaville logo is a registered trademark of Margaritaville Enterprises, LLC. Each of these logos are used by us under license.
All other logos in the table above are registered trademarks of DPS or its subsidiaries.
In the CSD market in the U.S. and Canada, we participate primarily in the flavored CSD category. Our key brands are Dr Pepper, Canada Dry, 7UP, Squirt, Crush, A&W, Sunkist soda, Schweppes, Sun Drop, and we also sell regional and smaller niche brands. In the CSD market, we distribute finished beverages and manufacture beverage concentrates and fountain syrups. Beverage concentrates are highly concentrated proprietary flavors used to make syrup or finished beverages. We manufacture beverage concentrates that are used by our own Packaged Beverages and Latin America Beverages segments, as well as sold to third party bottling companies. According to Nielsen, we had a 20.7% share of the U.S. CSD market in both 2013 and 2012 (measured by retail sales). We also manufacture fountain syrup that we sell to the foodservice industry directly, through bottlers or through third parties.
In the NCB market segment in the U.S., we participate primarily in the ready-to-drink tea, juice, juice drinks and mixer categories. Our key NCB brands are Hawaiian Punch, Snapple, Mott's, and Clamato, and we also sell regional and smaller niche brands. We manufacture most of our NCBs as ready-to-drink beverages and distribute them through our own distribution network and through third parties or direct to our customers' warehouses. In addition to NCB beverages, we also manufacture Mott's apple sauce as a finished product.
In Mexico and the Caribbean, we participate primarily in the carbonated mineral water, flavored CSD, bottled water and vegetable juice categories. Our key brands in Mexico include Peñafiel, Squirt, Aguafiel, Crush and Clamato. In Mexico, we manufacture and sell our brands through both our own manufacturing and distribution operations as well as third party bottlers. In the Caribbean, we distribute our products solely through third party distributors and bottlers.
In 2013, we manufactured and/or distributed approximately 49% of our total products sold in the U.S. (as measured by volume). In addition, our businesses manufacture and/or distribute a variety of brands owned by third parties in specified licensed geographic territories.
OUR STRENGTHS
 The key strengths of our business are:
Strong portfolio of leading, consumer-preferred brands.  We own a diverse portfolio of well-known CSD and NCB brands. Many of our brands enjoy high levels of consumer awareness, preference and loyalty rooted in their rich heritage, which drive their market positions. Our diverse portfolio provides our bottlers, distributors and retailers with a wide variety of products and provides us with a platform for growth and profitability. We are the #1 flavored CSD company in the U.S. Our largest brand, Dr Pepper, is the #2 flavored CSD in the U.S., according to Nielsen, and our Snapple brand is a leading ready-to-drink tea. Overall, in 2013, approximately 83% of our volume was generated by brands that hold either the #1 or #2 position in their category. The strength of our significant brands has allowed us to launch innovations and brand extensions such as our Snapple Half 'n Half in 2013. During 2013, we also launched five new additions (7UP, Sunkist soda, A&W, Canada Dry and RC Cola) to our TEN platform.

4


Integrated business model.  Our integrated business model 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. For example, we can focus on maximizing profitability for our company as a whole rather than focusing on profitability generated from either the sale of beverage concentrates or the bottling and distribution of our products. Additionally, our integrated business model enables us to be more flexible and responsive to the changing needs of our large retail customers by coordinating sales, service, distribution, promotions and product launches and allows us to more fully leverage our scale and reduce costs by creating greater geographic manufacturing and distribution coverage. Our manufacturing and distribution system also enables us to improve focus on our brands, especially certain brands such as 7UP, Sunkist soda, A&W, Squirt, Vernors, Canada Dry, Hawaiian Punch and Snapple, which do not have a large presence in the bottler systems affiliated with The Coca-Cola Company ("Coca-Cola") or PepsiCo, Inc. ("PepsiCo").
Strong customer relationships.  Our brands have enjoyed long-standing relationships with many of our top customers. We sell our products to a wide range of customers, from bottlers and distributors to national retailers, large food service and convenience store customers. We have strong relationships with some of the largest bottlers and distributors, including those affiliated with Coca-Cola and PepsiCo, some of the largest and most important retailers, including Wal-Mart Stores, Inc. ("WalMart"), The Kroger Co., SUPERVALU, Inc., Safeway Inc., Publix Super Markets, Inc. and Target Corporation, some of the largest food service customers, including McDonald's Corporation, Burger King Corp., Yum! Brands, Inc., Sonic Corp., The Wendy's Company, Subway Restaurants, Jack in the Box, Inc., Chick-fil-A, Inc. and Arby's Group, Inc., and convenience store customers, including 7-Eleven, Inc., Circle K Enterprises, Inc. and OXXO. Our portfolio of strong brands, operational scale and experience across beverage segments has enabled us to maintain strong relationships with our customers.
Attractive positioning within a large and profitable market.  We hold the #1 position in the U.S. flavored CSD beverage markets by volume according to Beverage Digest. We are also a leader in the Canada and Mexico beverage markets. Our portfolio of products is biased toward flavored CSDs, which continue to gain market share versus cola CSDs, but also focuses on emerging categories such as teas and juices. We believe marketing and product innovations that target fast growing population segments, such as the Hispanic community in the U.S., could drive market growth.
Broad geographic manufacturing and distribution coverage.  As of December 31, 2013, we had 18 manufacturing facilities and 113 principal distribution centers and warehouse facilities in the U.S., as well as two manufacturing facilities and eight principal distribution centers and warehouse facilities in Mexico. These facilities use a variety of manufacturing processes. We have strategically located manufacturing and distribution capabilities, enabling us to better align our operations with our customers, reduce transportation costs and have greater control over the timing and coordination of new product launches. In addition, our warehouses are generally located at or near bottling plants and geographically dispersed to ensure our products are available to meet consumer demand. We actively manage transportation of our products using our own fleet of approximately 6,000 delivery trucks, as well as third party logistics providers on a selected basis.
Strong operating margins and stable cash flows.  The breadth of our brand portfolio has enabled us to generate strong operating margins which have delivered stable cash flows. These cash flows enable us to consider a variety of alternatives, such as investing in our business, repurchasing shares of our common stock, paying dividends to our stockholders and reducing our debt. As a result of our stable cash flows and the reduction of our capital expenditures, we have been able to increase our dividends each year in order to return more cash to our stockholders.
Experienced executive management team.  Our executive management team has over 200 years of collective experience in the food and beverage industry. The team has broad experience in brand ownership, manufacturing and distribution, and enjoys strong relationships both within the industry and with major customers. In addition, our management team has diverse skills that support our operating strategies, including driving organic growth through targeted and efficient marketing, improving productivity of our operations, aligning manufacturing and distribution interests and executing strategic acquisitions.
OUR STRATEGY
 The key elements of our business strategy are to:
Build and enhance leading brands.  We have a well-defined portfolio strategy to allocate our marketing and sales resources. We use an on-going process of market and consumer analysis to identify key brands that we believe have the greatest potential for profitable sales growth. We intend to continue to invest most heavily in our key brands to drive profitable and sustainable growth by strengthening consumer awareness, developing innovative products and extending brands to take advantage of evolving consumer trends, improving distribution and increasing promotional effectiveness. We also focus on new distribution agreements for emerging, high-growth third party brands in new categories that can use our manufacturing and distribution network. We can provide these new brands with distribution capability and resources to grow, and they provide us with exposure to growing segments of the market with relatively low risk and capital investment.

5


Increase presence in high margin channels and packages.  We are focused on improving our product presence in high margin channels, such as convenience stores, vending machines and small independent retail outlets, through increased selling activity and investments in coolers and other cold drink equipment. We have continued the placement program for our branded coolers and other cold drink equipment and intend to selectively increase the number of those types of equipment where we believe we can achieve an attractive return on investment. We also intend to increase demand for high margin products like single-serve packages for many of our key brands through increased in-store activity.
Leverage our integrated business model.  We believe our integrated brand ownership, manufacturing and distribution business model provides us opportunities for net sales and profit growth through the alignment of the economic interests of our brand ownership and our manufacturing and distribution businesses. We intend to continue leveraging our integrated business model to reduce costs by creating greater geographic manufacturing and distribution coverage and to be more flexible and responsive to the changing needs of our large retail customers by coordinating sales, service, distribution, promotions and product launches.
Strengthen our route-to-market.  Strengthening our route-to-market will ensure the ongoing health of our brands. We continue to invest in information technology ("IT") to improve route productivity and data integrity and standards. With third party bottlers, we continue to deliver programs that maintain priority for our brands in their systems.
Improve operating efficiency.  We have been able to create multi-product manufacturing facilities which provide a region with a wide variety of our products at reduced transportation and co-packing costs. In 2011, we launched our Rapid Continuous Improvement ("RCI") initiative, which uses Lean and Six Sigma methods to deliver customer value and improve productivity. In 2011, we set a three-year goal to improve cash productivity by $150 million through reductions in our capital expenditures and working capital requirements and productivity improvements within our operations. During 2013, we exceeded this goal. We believe RCI is a means to achieve net income growth and increase the amount of cash returned to our stockholders.
OUR BUSINESS OPERATIONS
 As of December 31, 2013, our operating structure consists of three business segments: Beverage Concentrates, Packaged Beverages and Latin America Beverages. Segment financial data for 2013, 2012 and 2011, including financial information about foreign and domestic operations, is included in Note 21 of the Notes to our Audited Consolidated Financial Statements.
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. In 2013, our Beverage Concentrates segment had net sales of approximately $1,229 million. Key brands include Dr Pepper, Canada Dry, Crush, Schweppes, A&W, Sunkist soda, 7UP, Sun Drop, RC Cola, Squirt, Diet Rite, Vernors and the concentrate form of Hawaiian Punch.
 We are the industry leader in flavored CSDs with a 39.5% market share in the U.S. for 2013 as measured by retail sales according to Nielsen. We are also the third largest CSD brand owner as measured by 2013 retail sales in the U.S. and Canada and we own a leading brand in most of the CSD categories in which we compete.
 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 a finished beverage to retailers. Beverage concentrates are also manufactured into syrup, which is shipped to fountain customers, such as fast food restaurants, who mix the syrup with water and carbonation to create a finished beverage at the point of sale to consumers. Dr Pepper represents most of our fountain channel volume. Concentrate prices historically have been reviewed and adjusted at least on an annual basis.
Our Beverage Concentrates brands are sold by 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. Unlike the majority of our other CSD brands, 63% of Dr Pepper volumes are distributed through the Coca-Cola affiliated and PepsiCo affiliated bottler systems.
PepsiCo and Coca-Cola are the two largest customers of the Beverage Concentrates segment, and constituted approximately 26% and 21%, respectively, of the segment's net sales during 2013.

6


Packaged Beverages
Our Packaged Beverages segment is principally a brand ownership, manufacturing and distribution business. In this segment, we primarily manufacture and distribute packaged beverages and other products, including our brands, third party owned brands and certain private label beverages, in the U.S. and Canada. In 2013 our Packaged Beverages segment had net sales of approximately $4,306 million. Key NCB brands in this segment include Snapple, Hawaiian Punch, Mott's, Yoo-Hoo, Clamato, FIJI, Deja Blue, AriZona, ReaLemon, Mistic, Mr and Mrs T mixers, Nantucket Nectars, and Rose's. Key CSD brands in this segment include 7UP, Dr Pepper, A&W, Canada Dry, Sunkist soda, Squirt, RC Cola, Big Red, Vernors, Diet Rite and Sun Drop. 
Approximately 84% of our 2013 Packaged Beverages net sales of branded products come from our own brands, with the remaining from the distribution of third party brands such as Big Red, FIJI, AriZona, Vita Coco, Neuro and Hydrive. 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. Although the majority of our Packaged Beverages' net sales relate to our brands, we also provide a route-to-market for third party brand owners seeking effective distribution for their new and emerging brands. These brands give us exposure in certain markets to fast growing segments of the beverage industry with minimal capital investment.
Our Packaged Beverages' products are manufactured in multiple facilities across the U.S. and are sold or distributed to retailers and their warehouses by our own distribution network or by third party distributors. The raw materials used to manufacture our products include aluminum cans and ends, glass bottles, PET bottles and caps, paper products, sweeteners, juices, water and other ingredients.
We sell our Packaged Beverages' products both through our Direct Store Delivery system ("DSD") and our Warehouse Direct delivery system ("WD"), both of which include the sales to all major retail channels, including supermarkets, fountain channel, mass merchandisers, club stores, vending machines, convenience stores, gas stations, small groceries, drug chains and dollar stores.
In 2013, WalMart, the largest customer of our Packaged Beverages segment, accounted for approximately 16% of our net sales in this segment.
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 CSDs. In 2013, our Latin America Beverages segment had net sales of $462 million, with our operations in Mexico representing approximately 90% of the net sales of this segment. Key brands include Peñafiel, Squirt, Aguafiel, Crush and Clamato.
In Mexico, we manufacture and distribute our products through our bottling operations and third party bottlers and distributors. In the Caribbean, we distribute our products through third party bottlers and distributors. In Mexico, we also participate in a joint venture to manufacture Aguafiel brand water with Acqua Minerale San Benedetto. We provide expertise in the Mexican beverage market and Acqua Minerale San Benedetto provides expertise in water production and new packaging technologies.
We sell our finished beverages through all major Mexican retail channels, including "mom and pop" stores, supermarkets, hypermarkets and on premise channels.
BOTTLER AND DISTRIBUTOR AGREEMENTS
In the U.S. and Canada, we generally grant perpetual, exclusive license agreements for CSD brands and packages to bottlers for specific geographic areas. Many of our brands such as Snapple, Mistic, Nantucket Nectars, Yoo-Hoo and Orangina, are licensed for distribution in various territories to bottlers and a number of smaller distributors such as beer wholesalers, wine and spirit distributors, independent distributors and retail brokers. These agreements prohibit bottlers and distributors from selling the licensed products outside their exclusive territory and selling any imitative products in that territory. Generally, we may terminate bottling and distribution agreements only for cause or change in control and the bottler or distributor may terminate without cause upon giving certain specified notice and complying with other applicable conditions. Fountain agreements for bottlers generally are not exclusive for a territory, but do restrict bottlers from carrying imitative product in the territory.

7


Agreements with PepsiCo and Coca-Cola
On February 26, 2010, we completed the licensing of certain brands to PepsiCo following PepsiCo's acquisition of Pepsi Bottling Group and PepsiAmericas, Inc. The agreements have an initial period of 20 years with automatic 20-year renewal periods and require PepsiCo to meet certain performance conditions.
On October 4, 2010, we completed the licensing of certain brands to Coca-Cola following Coca-Cola's acquisition of Coca-Cola Enterprises' North American Bottling Business and executed separate agreements pursuant to which Coca-Cola began offering Dr Pepper and Diet Dr Pepper in local fountain accounts and its Freestyle fountain program. The agreements have an initial period of 20 years with automatic 20-year renewal periods and require Coca-Cola to meet certain performance conditions.
Under a separate agreement, Coca-Cola has agreed to include Dr Pepper and Diet Dr Pepper brands in its Freestyle fountain program. The Freestyle fountain program agreement has a period of 20 years.
CUSTOMERS
We primarily serve two groups of customers: 1) bottlers and distributors and 2) retailers.
Bottlers buy beverage concentrates from us and, in turn, they manufacture, bottle, sell and distribute finished beverages. Bottlers also manufacture and distribute syrup for the fountain foodservice channel. In addition, bottlers and distributors purchase finished beverages from us and sell them to retail and other customers. We have strong relationships with bottlers affiliated with Coca-Cola and PepsiCo primarily because of the strength and market position of our key Dr Pepper brand.
Retailers also buy finished beverages directly from us. Our portfolio of strong brands, operational scale and experience in the beverage industry have enabled us to maintain strong relationships with major retailers in the U.S., Canada and Mexico. In 2013, our largest retailer was WalMart, representing approximately 12% of our consolidated net sales.
SEASONALITY
The beverage market is subject to some seasonal variations. Our beverage sales are generally higher during the warmer months and also can be influenced by the timing of holidays as well as weather fluctuations.
COMPETITION
The LRB industry is highly competitive and continues to evolve in response to changing consumer preferences. Competition is generally based upon brand recognition, taste, quality, price, availability, selection and convenience. We compete with multinational corporations with significant financial resources. Our two largest competitors in the LRB market are Coca-Cola and PepsiCo, which collectively represent approximately 60% of the U.S. LRB market by volume, according to Beverage Digest. We also compete against other large companies, including Nestlé, S.A. ("Nestle"), Kraft Foods Group, Inc. and The Campbell Soup Company ("Campbell Soup"). These competitors can use their resources and scale to rapidly respond to competitive pressures and changes in consumer preferences by introducing new products, reducing prices or increasing promotional activities. As a bottler and manufacturer, we also compete with a number of smaller bottlers and distributors and a variety of smaller, regional and private label manufacturers, such as The Cott Corporation ("Cott"). Smaller companies may be more innovative, better able to bring new products to market and better able to quickly exploit and serve niche markets. We have lower exposure to some of the faster growing non-carbonated and bottled water segments in the overall LRB market. In Canada, Mexico and the Caribbean, we compete with many of these same international companies as well as a number of regional competitors.
Although these bottlers and distributors are our competitors, many of these companies are also our customers as they purchase beverage concentrates from us.
INTELLECTUAL PROPERTY AND TRADEMARKS
Our Intellectual Property.  We possess a variety of intellectual property rights that are important to our business. We rely on a combination of trademarks, copyrights, patents and trade secrets to safeguard our proprietary rights, including our brands and ingredient and production formulas for our products.

8


Our Trademarks.  Our trademark portfolio includes approximately 2,300 registrations and applications in the U.S., Canada, Mexico and other countries. Brands we own through various subsidiaries in various jurisdictions include Dr Pepper, 7UP, A&W, Canada Dry, RC Cola, Schweppes, Squirt, Crush, Peñafiel, Sun Drop, Aguafiel, Snapple, Mott's, Hawaiian Punch, Clamato, Mistic, Nantucket Nectars, Mr & Mrs T, ReaLemon, Venom and Deja Blue. We own trademark registrations for most of these brands in the U.S., and we own trademark registrations for some but not all of these brands in Canada, Mexico and other countries. We also own trademark registrations for a number of smaller regional brands. Some of our other trademark registrations are in countries where we do not currently have any significant level of business. In addition, in many countries outside the U.S., Canada and Mexico, our rights to many of our CSD brands, including our Dr Pepper trademark and formula, were sold by Cadbury Schweppes beginning over a decade ago to third parties including, in certain cases, to competitors such as Coca-Cola.
Trademarks Licensed from Others.  We license various trademarks from third parties, which generally allow us to manufacture and distribute certain products or brands throughout the U.S. and/or Canada and Mexico. For example, we license from third parties the Sunkist soda, Welch's, Country Time, Orangina, Stewart's, Rose's, Holland House and Margaritaville trademarks. Although these licenses vary in length and other terms, they generally are long-term, cover the entire U.S. and/or Canada and Mexico and generally include a royalty payment to the licensor.
Licensed Distribution Rights.  We have rights in certain territories to bottle and/or distribute various brands we do not own, such as AriZona, FIJI, Vita Coco and Neuro. Some of these arrangements are relatively shorter in term and limited in geographic scope, and the licensor may be able to terminate the agreement upon an agreed period of notice, in some cases without payment to us.
Intellectual Property We License to Others.  We license some of our intellectual property, including trademarks, to others. For example, we license the Dr Pepper trademark to certain companies for use in connection with food, confectionery and other products. We also license certain brands, such as Dr Pepper and Snapple, to third parties for use in beverages in certain countries where we own the brand but do not otherwise operate our business.
MARKETING
Our marketing strategy is to grow our brands through continuously providing new solutions to meet consumers' changing preferences and needs. We identify these preferences and needs and then develop innovative consumer and shopper programs to address the opportunities. Solutions include new and reformulated products, improved packaging design, pricing and enhanced availability. We use advertising, sponsorships, merchandising, public relations, promotions and social media to provide maximum impact for our brands and messages.
MANUFACTURING
As of December 31, 2013, we operated 20 manufacturing facilities across the U.S. and Mexico. Almost all of our CSD beverage concentrates are manufactured at a single plant in St. Louis, Missouri. All of our manufacturing facilities are either regional manufacturing facilities, with the capacity and capabilities to manufacture many brands and packages, facilities with particular capabilities that are dedicated to certain brands or products, or smaller bottling plants with a more limited range of packaging capabilities.
We employed approximately 5,000 full-time manufacturing employees in our facilities as of December 31, 2013. We have a variety of production capabilities, including hot-fill, cold-fill and aseptic bottling processes, and we manufacture beverages in a variety of packaging materials, including aluminum, glass and PET cans and bottles and a variety of package formats, including single-serve and multi-serve packages and "bag-in-box" fountain syrup packaging.
In 2013, 90% of our manufactured volumes came from our brands and 10% from third party and private-label products. We also use third party manufacturers to package our products for us on a limited basis.


9


WAREHOUSING AND DISTRIBUTION
As of December 31, 2013, our distribution network consisted of 113 principal distribution centers and warehouses in the U.S. and eight principal distribution centers and warehouses in Mexico. Our warehouses are generally located at or near bottling plants and are geographically dispersed to ensure product is available to meet consumer demand. We actively manage the sale, merchandising and transportation of our products using a combination of our own fleet of approximately 6,000 delivery vehicles and third party logistics providers.
RAW MATERIALS
The principal raw materials we use in our business are aluminum cans and ends, glass bottles, PET bottles and caps, paper products, sweeteners, juice, fruit, water and other ingredients. The cost of such raw materials can fluctuate substantially. In addition, we are significantly impacted by changes in fuel costs due to the large truck fleet we operate in our distribution businesses.
Under many of our supply arrangements for these raw materials, the price we pay fluctuates along with certain changes in underlying commodities costs, such as aluminum in the case of cans, natural gas in the case of glass bottles, resin in the case of PET bottles and caps, corn in the case of sweeteners and pulp in the case of paperboard packaging. Manufacturing costs for our Packaged Beverages segment, where we manufacture and bottle finished beverages, are higher as a percentage of our net sales than our Beverage Concentrates segment as the Packaged Beverages segment requires the purchase of a much larger portion of the packaging and ingredients. Although we have contracts with a relatively small number of suppliers, we have generally not experienced any difficulties in obtaining the required amount of raw materials.
When appropriate, we mitigate the exposure to volatility in the prices of certain commodities used in our production process through the use of forward contracts and supplier pricing agreements. The intent of the contracts and agreements is to provide a certain level of short-term predictability in our operating margins and our overall cost structure, while remaining in what we believe to be a competitive cost position.
RESEARCH AND DEVELOPMENT
Our research and development team is composed of scientists and engineers in the U.S. and Mexico who are focused on developing high quality products which have broad consumer appeal, can be sold at competitive prices and can be safely and consistently produced across a diverse manufacturing network. Our research and development team engages in activities relating to product development, microbiology, analytical chemistry, process engineering, sensory science, nutrition, knowledge management and regulatory compliance. We have particular expertise in flavors and sweeteners, which allows us to focus our research in areas of importance to the industry, such as new sweetener development. Research and development costs are expensed when incurred and amounted to $15 million for each of 2013, 2012 and 2011. Additionally, we incurred packaging engineering costs of $6 million for each of 2013, 2012 and 2011. These expenses are recorded in selling, general and administrative expenses in our Consolidated Statements of Income.
INFORMATION TECHNOLOGY
We use a variety of IT systems and networks configured to meet our business needs. Our primary IT data center is hosted in Toronto, Canada by a third party provider. We also use a third party vendor for application support and maintenance, which is based in India and provides resources offshore and onshore.
EMPLOYEES
At December 31, 2013, we employed approximately 19,000 employees.
In the U.S., we have approximately 16,000 full-time employees. We have union collective bargaining agreements covering approximately 4,000 full-time employees. Several agreements cover multiple locations. These agreements address working conditions as well as wage rates and benefits. In Mexico and the Caribbean, we employ approximately 3,000 full-time employees, with approximately 2,000 employees party to collective bargaining agreements. We do not have a significant number of employees in Canada.
We believe we have good relations with our employees.

10


REGULATORY MATTERS
We are subject to a variety of federal, state and local laws and regulations in the countries in which we do business. Regulations apply to many aspects of our business, including our products and their ingredients, manufacturing, safety, labeling, transportation, recycling, advertising and sale. For example, our products and their manufacturing, labeling, marketing and sale in the U.S. are subject to various aspects of the Federal Food, Drug, and Cosmetic Act, the Federal Trade Commission Act, the Lanham Act, state consumer protection laws and state warning and labeling laws. In Canada and Mexico, the manufacture, distribution, marketing and sale of our many products are also subject to similar statutes and regulations. Additionally, the government of Mexico enacted broad based tax reform, including a one peso per liter tax on the manufacturing of certain sugar-sweetened beverages, which went into effect January 1, 2014, as a result of concerns about the public health consequences and health care costs associated with obesity.
We and our bottlers use various refillable and non-refillable, recyclable bottles and cans in the U.S. and other countries. Various states and other authorities require deposits, eco-taxes or fees on certain containers. Similar legislation or regulations may be proposed in the future at local, state and federal levels, both in the U.S. and elsewhere. In Mexico, the government has encouraged the soft drink industry to comply voluntarily with collection and recycling programs of plastic material, and we are in compliance with these programs.
ENVIRONMENTAL, HEALTH AND SAFETY MATTERS
In the normal course of our business, we are subject to a variety of federal, state and local environmental, health and safety laws and regulations. We maintain environmental, health and safety policies and a quality, environmental, health and safety program designed to ensure compliance with applicable laws and regulations. The cost of such compliance measures does not have a material financial impact on our operations.
AVAILABLE INFORMATION
Our web site address is www.drpeppersnapplegroup.com. Information on our web site is not incorporated by reference in this document. We make available, free of charge through this web site, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission.
MARKET AND INDUSTRY DATA
The market and industry data in this Annual Report on Form 10-K is from independent industry sources, including Nielsen and Beverage Digest. Although we believe that these independent sources are reliable, we have not verified the accuracy or completeness of this data or any assumptions underlying such data.
Nielsen is a marketing information provider, primarily serving consumer packaged goods manufacturers and retailers. We use Nielsen data as our primary management tool to track market performance because it has broad and deep data coverage, is based on consumer transactions at retailers, and is reported to us monthly. Nielsen data provides measurement and analysis of marketplace trends such as market share, retail pricing, promotional activity and distribution across various channels, retailers and geographies. Measured categories provided to us by Nielsen Scantrack include CSDs, energy drinks, single-serve bottled water, non-alcoholic mixers and NCBs, including ready-to-drink teas, single-serve and multi-serve juice and juice drinks, and sports drinks. Nielsen also provides data on other food items such as apple sauce. Nielsen data we present in this report is from Nielsen's Scantrack service, which compiles data based on scanner transactions in key retail channels, including grocery stores, mass merchandisers (including WalMart), drug chains, convenience stores and gas stations. However, this data does not include the fountain or vending channels, or small independent retail outlets, which together represent a meaningful portion of the U.S. LRB market and of our net sales and volume.
Beverage Digest is an independent beverage research company that publishes an annual Beverage Digest Fact Book. We use Beverage Digest primarily to track market share information and broad beverage and channel trends. This annual publication provides a compilation of data supplied by beverage companies. Beverage Digest covers the following categories: CSDs, energy drinks, bottled water and NCBs (including ready-to-drink teas, juice and juice drinks and sports drinks). Beverage Digest data does not include multi-serve juice products or bottled water in packages of 1.5 liters or more. Data is reported for certain sales channels, including grocery stores, mass merchandisers, club stores, drug chains, convenience stores, gas stations, fountains, vending machines and the "up-and-down-the-street" channel consisting of small independent retail outlets.

11


We use both Nielsen and Beverage Digest to assess both our own and our competitors' performance and market share in the U.S. Different market share rankings can result for a specific beverage category depending on whether data from Nielsen or Beverage Digest is used, in part because of the differences in the sales channels reported by each source. For example, because the fountain channel (where we have a relatively small business except for Dr Pepper) is not included in Nielsen data, our market share using Nielsen data is generally higher for our CSD portfolio than the Beverage Digest data, which does include the fountain channel.
In this Annual Report on Form 10-K, all information regarding the beverage market in the U.S. is from Beverage Digest, and, except as otherwise indicated, is from 2012. All information regarding our brand market positions in the U.S. is from Nielsen and is based on retail dollar sales in 2013.
ITEM 1A. RISK FACTORS
RISKS RELATED TO OUR BUSINESS
In addition to the other information set forth in this report, you should carefully consider the risks described below, which could materially affect our business, financial condition or future results. Any of the following risks, as well as other risks and uncertainties, could harm our business and financial condition. 
We may not effectively respond to changing consumer preferences, trends, health concerns and other factors.
Consumers' preferences can change due to a variety of factors, including the age and ethnic demographics of the population, social trends, negative publicity, economic downturn or other factors. For example, consumers are increasingly concerned about health and wellness, focusing on the caloric intake associated with regular CSDs and the use of artificial sweeteners in diet CSDs. As such, the demand for CSDs has decreased as consumers have shifted towards NCBs, such as water, ready-to-drink teas and sports drinks. If we do not effectively anticipate these trends and changing consumer preferences, then quickly develop new products in response, our sales could suffer. Developing and launching new products can be risky and expensive. We may not be successful in responding to changing markets and consumer preferences, and some of our competitors may be better able to respond to these changes, either of which could negatively affect our business and financial performance.
New or proposed beverage taxes or regulations could impact our sales.
During the fourth quarter of 2013, the government of Mexico enacted broad based tax reform, including a one peso per liter tax on the manufacturing of certain sugar-sweetened beverages, which went into effect January 1, 2014, as a result of concerns about the public health consequences and health care costs associated with obesity. Federal, state, local and other foreign governments could also impose taxes on sugar-sweetened beverages as a result of these concerns. Additionally, local and regional governments and school boards have enacted, or have proposed to enact, regulations restricting the sale of certain types or sizes of soft drinks in municipalities and schools as a result of these concerns. Any changes of regulations or imposed taxes may reduce consumer demand for our products or could cause us to raise our prices, both of which could have a material adverse effect on our profitability and negatively affect our business and financial performance.
We operate in highly competitive markets.
The LRB industry is highly competitive and continues to evolve in response to changing consumer preferences. Competition is generally based upon brand recognition, taste, quality, price, availability, selection and convenience. Brand recognition can also be impacted by the effectiveness of our advertising campaigns and marketing programs, as well as our use of social media. We compete with multinational corporations with significant financial resources. Our two largest competitors in the LRB market are Coca-Cola and PepsiCo, which represent approximately 60% of the U.S. LRB market by volume, according to Beverage Digest. We also compete against other large companies, including Nestle, Kraft Foods Group, Inc. and Campbell Soup. These competitors can use their resources and scale to rapidly respond to competitive pressures and changes in consumer preferences by introducing new products, changing their route to market, reducing prices or increasing promotional activities. As a bottler and manufacturer, we also compete with a number of smaller bottlers and distributors and a variety of smaller, regional and private label manufacturers, such as Cott. Smaller companies may be more innovative, better able to bring new products to market and better able to quickly exploit and serve niche markets. We have lower exposure to energy drinks, some of the faster growing NCBs and the bottled water segments in the overall LRB market. In Canada, Mexico and the Caribbean, we compete with many of these same international companies as well as a number of regional competitors.
If we are unable to compete effectively, our sales could decline. As a result, we would have to reduce our prices or increase our spending on marketing, advertising and product innovation. Any of these could negatively affect our business and financial performance.

12


We depend on a small number of large retailers for a significant portion of our sales.
Food and beverage retailers in the U.S. have been consolidating, resulting in large, sophisticated retailers with increased buying power. They are in a better position to resist our price increases and demand lower prices. They also have leverage to require us to provide larger, more tailored promotional and product delivery programs. If we and our bottlers and distributors do not successfully provide appropriate marketing, product, packaging, pricing and service to these retailers, our product availability, sales and margins could suffer. Certain retailers make up a significant percentage of our products' retail volume, including volume sold by our bottlers and distributors. Some retailers also offer their own private label products that compete with some of our brands. The loss of sales of any of our products by a major retailer could have a material adverse effect on our business and financial performance.
We depend on third party bottling and distribution companies for a portion of our business.
Net sales from our Beverage Concentrates segment represent sales of beverage concentrates to third party bottling companies that we do not own. The Beverage Concentrates segment's operations generate a significant portion of our overall segment operating profit. Some of these bottlers, such as PepsiCo and Coca-Cola, are also our competitors. The majority of these bottlers' business comes from selling either their own products or our competitors' products. In addition, some of the products we manufacture are distributed by third parties. As independent companies, these bottlers and distributors make their own business decisions. They may have the right to determine whether, and to what extent, they produce and distribute our products, our competitors' products and their own products. They may devote more resources to other products or take other actions detrimental to our brands. In most cases, they are able to terminate their bottling and distribution arrangements with us without cause. We may need to increase support for our brands in their territories and may not be able to pass on price increases to them. Their financial condition could also be adversely affected by conditions beyond our control, and our business could suffer as a result. Deteriorating economic conditions could negatively impact the financial viability of third party bottlers. Any of these factors could negatively affect our business and financial performance. 
Our financial results may be negatively impacted by recession, financial and credit market disruptions and other economic conditions.
Changes in economic and financial conditions in the U.S., Canada, Mexico or the Caribbean may negatively impact consumer confidence and consumer spending, which could result in a reduction in our sales volume and/or switching to lower price offerings. Similarly, disruptions in financial and credit markets worldwide 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. Additionally, these disruptions could have a negative effect on our ability to raise capital through the issuance of unsecured commercial paper or senior notes.
We could also face increased counterparty risk for our cash investments and our hedging arrangements. Declines in the securities and credit markets could also affect our marketable securities and pension fund, which in turn could increase funding requirements.
Costs for raw materials and energy costs may increase substantially.
The principal raw materials we use in our products are aluminum cans and ends, glass bottles, PET bottles and caps, paperboard packaging, sweeteners, juice, fruit, water and other ingredients. The cost of such raw materials can fluctuate substantially. Under many of our supply arrangements, the price we pay for raw materials fluctuates along with certain changes in underlying commodities costs, such as aluminum in the case of cans, natural gas in the case of glass bottles, resin in the case of PET bottles and caps, corn in the case of sweeteners and pulp in the case of paperboard packaging.
In addition, we use a significant amount of energy in our business. We are significantly impacted by increases in fuel costs due to the large truck fleet we operate in our distribution businesses and our use of third party carriers. Additionally, conversion of raw materials into our products for sale uses electricity and natural gas.
Continued price increases could exert pressure on our costs and we may not be able to effectively hedge or pass along any such increases to our customers or consumers. Price increases we pass along to our customers or consumers could reduce demand for our products. Such increases could negatively affect our business and financial performance.

13


Increases in our cost of benefits and multi-employer plan withdrawal liabilities in the future could reduce our profitability.
Our profitability is substantially affected by costs for employee health care, pension and other retirement programs and other benefits. In recent years, these costs have increased significantly due to factors such as increases in health care costs, declines in investment returns on pension assets and changes in discount rates used to calculate pension and related liabilities. These factors plus the enactment of the Patient Protection and Affordable Care Act in March 2010 will continue to put pressure on our business and financial performance. Although we actively seek to control increases in costs, there can be no assurance that we will succeed in limiting future cost increases, and continued upward pressure in costs could have a material adverse effect on our business and financial performance.
Additionally, we currently participate in four multi-employer pension plans in the United States. The plans we participate in have collective bargaining agreements, which will expire at various dates through 2016. In the event that it becomes probable that we intend to withdraw from participation in any of these plans, U.S. GAAP would require us to record a withdrawal liability if it is estimable, which may be material and could negatively impact our financial performance in the applicable periods. Our pension expense for U.S. multi-employer plans totaled $63 million for the year ended December 31, 2013, which included a withdrawal charge of $56 million as we intend to withdraw from the Soft Drink Industry Local Union 710 Pension Fund during our upcoming collective bargaining session.
Determinations in the future that a significant impairment of the value of our goodwill and other indefinite-lived intangible assets has occurred and could have a material adverse effect on our results of operations.
As of December 31, 2013, we had $8,201 million of total assets, of which approximately $5,682 million were goodwill and other intangible assets. Intangible assets include both definite and indefinite-lived intangible assets in connection with brands, bottler agreements, distribution rights and customer relationships. We conduct impairment tests on goodwill and all indefinite-lived intangible assets annually, as of October 1, or more frequently if circumstances indicate that the carrying amount of an asset may not be recoverable. If the carrying amount of an intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. There was no impairment required based upon our annual impairment analysis performed as of October 1, 2013. For additional information about these intangible assets, see "Critical Accounting Estimates — Goodwill and Other Indefinite-Lived Intangible Assets" and "Management's Discussion and Analysis of Financial Condition and Results of Operations," in Item 7 and our Audited Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data," in this Annual Report on Form 10-K.
The impairment tests require us to make an estimate of the fair value of our reporting units and other intangible assets. An impairment could be recorded as a result of changes in assumptions, estimates or circumstances, some of which are beyond our control. Factors which could result in an impairment include, but are not limited to: (i) reduced demand for our products; (ii) higher commodity prices; (iii) lower prices for our products or increased marketing as a result of increased competition; and (iv) significant disruptions to our operations as a result of both internal and external events. Since a number of factors may influence determinations of fair value of intangible assets, we are unable to predict whether impairments of goodwill or other indefinite-lived intangibles will occur in the future. Any such impairment would result in us recognizing a non-cash charge in our Consolidated Statements of Income, which could increase our effective tax rate and adversely affect our results of operations.
Our total indebtedness could affect our operations and profitability.
We maintain levels of debt we consider prudent based on our actual and expected cash flows. As of December 31, 2013, our total indebtedness was $2,574 million
This amount of debt could have important consequences to us and our investors, including:
requiring a portion of our cash flow from operations to make interest payments on this debt; and
increasing our vulnerability to general adverse economic and industry conditions, which could impact our debt maturity profile.
While we believe we will have the ability to service our debt and will have access to additional sources of capital in the future if and when needed, that will depend upon our results of operations and financial position at the time, the then-current state of the credit and financial markets and other factors that may be beyond our control.

14


Litigation or legal proceedings could expose us to significant liabilities and damage our reputation.
We are party to various litigation claims and legal proceedings which may include employment, tort, real estate, commercial and other litigation. From time to time we are a defendant in class action litigation, including litigation regarding employment practices, product labeling, and wage and hour laws. Plaintiffs in class action litigation may seek to recover amounts which are large and may be indeterminable for some period of time. We evaluate litigation claims and legal proceedings to assess the likelihood of unfavorable outcomes and estimate, if possible, the amount of potential losses. We will establish a reserve as appropriate based upon assessments and estimates in accordance with our accounting policies. We base our assessments, estimates and disclosures on the information available to us at the time and rely on legal and management judgment. Actual outcomes or losses may differ materially from assessments and estimates. Costs to defend litigation claims and legal proceedings and the cost of actual settlements, judgments or resolutions of these claims and legal proceedings may negatively affect our business and financial performance. Any adverse publicity resulting from allegations made in litigation claims or legal proceedings may also adversely affect our reputation, which in turn could adversely affect our results.
Certain raw materials we use are available from a limited number of suppliers and shortages could occur.
Some raw materials we use, such as aluminum cans and ends, glass bottles, PET bottles, sweeteners, fruit, juice and other ingredients, are sourced from industries characterized by a limited supply base. If our suppliers are unable or unwilling to meet our requirements, we could suffer shortages or substantial cost increases. Changing suppliers can require long lead times. The failure of our suppliers to meet our needs could occur for many reasons, including fires, natural disasters, weather, manufacturing problems, disease, crop failure, strikes, transportation interruption, government regulation, political instability and terrorism. A failure of supply could also occur due to suppliers' financial difficulties, including bankruptcy. Some of these risks may be more acute where the supplier or its plant is located in riskier or less-developed countries or regions. Any significant interruption to supply or cost increase could substantially harm our business and financial performance.
Substantial disruption to production at our manufacturing and distribution facilities could occur.
A disruption in production at our beverage concentrates manufacturing facility, which manufactures almost all of our concentrates, could have a material adverse effect on our business. In addition, a disruption could occur at any of our other facilities or those of our suppliers, bottlers or distributors. The disruption could occur for many reasons, including fire, natural disasters, weather, water scarcity, manufacturing problems, disease, strikes, transportation or supply interruption, government regulation or terrorism. Alternative facilities with sufficient capacity or capabilities may not be available, may cost substantially more or may take a significant time to start production, each of which could negatively affect our business and financial performance.
We may fail to comply with applicable government laws and regulations.
We are subject to a variety of federal, state and local laws and regulations in the U.S., Canada, Mexico and other countries in which we do business. These laws and regulations apply to many aspects of our business including the manufacture, safety, labeling, transportation, advertising and sale of our products. See "Regulatory Matters" in Item 1, "Business," of this Annual Report on Form 10-K for more information regarding many of these laws and regulations.
Violations of these laws or regulations in the manufacture, safety, labeling, transportation and advertising of our products could damage our reputation and/or result in regulatory actions with substantial penalties. In addition, any significant change in such laws or regulations or their interpretation, or the introduction of higher standards or more stringent laws or regulations, could result in increased compliance costs or capital expenditures. For example, changes in recycling and bottle deposit laws or special taxes on soft drinks or ingredients could increase our costs. Regulatory focus on the health, safety and marketing of food products is increasing. Certain state warning and labeling laws, such as California's "Prop 65," which requires warnings on any product with substances that the state lists as potentially causing cancer or birth defects, are or could become applicable to our products.
Weather, climate change legislation and the availability of water could adversely affect our business.
Unseasonable or unusual weather or long-term climate changes may negatively impact the price or availability of raw materials, energy and fuel, and demand for our products. Unusually cool weather during the summer months may result in reduced demand for our products and have a negative effect on our business and financial performance.
There is growing political and scientific sentiment that increased concentrations of carbon dioxide and other greenhouse gases in the atmosphere are influencing global weather patterns ("global warming"). Concern over climate change, including global warming, has led to legislative and regulatory initiatives directed at limiting greenhouse gas ("GHG") emissions. For example, proposals that would impose mandatory requirements on GHG emissions continue to be considered by policy makers in the countries in which we operate. Laws enacted that directly or indirectly affect our production, distribution, packaging, cost of raw materials, fuel, ingredients and water could all negatively impact our business and financial results.

15


We also may be faced with water availability risks. Water is the main ingredient in substantially all of our products. Climate change may cause water scarcity and a deterioration of water quality in areas where we maintain operations. The competition for water among domestic, agricultural and manufacturing users is increasing in the countries where we operate, and as water becomes scarcer or the quality of the water deteriorates, we may incur increased production costs or face manufacturing constraints which could negatively affect our business and financial performance. Even where water is widely available, water purification and waste treatment infrastructure limitations could increase costs or constrain our operations.
Our products may not meet health and safety standards or could become contaminated.
We have adopted various quality, environmental, health and safety standards. However, our products may still not meet these standards or could otherwise become contaminated. A failure to meet these standards or contamination could occur in our operations or those of our bottlers, distributors or suppliers. This could result in expensive production interruptions, recalls, liability claims and negative publicity. Moreover, negative publicity also could be generated from false, unfounded or nominal liability claims or limited recalls. Any of these failures or occurrences could negatively affect our business and financial performance.
Fluctuations in our effective tax rate may result in volatility in our operating results.
We are subject to income taxes in many U.S. and certain foreign jurisdictions. Income tax expense includes a provision for uncertain tax positions. At any one time, many tax years are subject to audit by various taxing jurisdictions. As these audits and negotiations progress, events may occur that change our expectation about how the audit will ultimately be resolved. As a result, there could be ongoing variability in our quarterly and/or annual tax rates as events occur that cause a change in our provision for uncertain tax positions. In addition, our effective tax rate in any given financial statement period may be significantly impacted by changes in the mix and level of earnings or by changes to existing accounting rules, tax regulations or interpretations of existing law. In addition, tax legislation may be enacted in the future, domestically or abroad, that impacts our effective tax rate.
We may not be able to renew collective bargaining agreements on satisfactory terms, or we could experience strikes.
As of December 31, 2013, approximately 6,000 of our employees, many of whom are at our key manufacturing locations, were covered by collective bargaining agreements. These agreements typically expire every three to four years at various dates. We may not be able to renew our collective bargaining agreements on satisfactory terms or at all. This could result in strikes or work stoppages, which could impair our ability to manufacture and distribute our products and result in a substantial loss of sales. The terms of existing or renewed agreements could also significantly increase our costs or negatively affect our ability to increase operational efficiency.
Our intellectual property rights could be infringed or we could infringe the intellectual property rights of others, and adverse events regarding licensed intellectual property, including termination of distribution rights, could harm our business.
We possess intellectual property that is important to our business. This intellectual property includes ingredient formulas, trademarks, copyrights, patents, business processes and other trade secrets. See "Intellectual Property and Trademarks" in Item 1, "Business," of this Annual Report on Form 10-K for more information. We and third parties, including competitors, could come into conflict over intellectual property rights. Litigation could disrupt our business, divert management attention and cost a substantial amount to protect our rights or defend ourselves against claims. We cannot be certain that the steps we take to protect our rights will be sufficient or that others will not infringe or misappropriate our rights. If we are unable to protect our intellectual property rights, our brands, products and business could be harmed.
We also license various trademarks from third parties and license our trademarks to third parties. In some countries, other companies own a particular trademark which we own in the U.S., Canada or Mexico. For example, the Dr Pepper trademark and formula is owned by Coca-Cola in certain other countries. Adverse events affecting those third parties or their products could affect our use of these trademarks or negatively impact our brands.
In some cases, we license products from third parties that we distribute. The licensor may be able to terminate the license arrangement upon an agreed period of notice, in some cases without payment to us of any termination fee. The termination of any material license arrangement could adversely affect our business and financial performance.
Our facilities and operations may require substantial investment and upgrading.
We have an ongoing program of investment and upgrading in our manufacturing, distribution and other facilities. We expect to incur significant costs to upgrade or keep up-to-date various facilities and equipment or restructure our operations, including closing existing facilities or opening new ones. If our investment and restructuring costs are higher than anticipated or our business does not develop as anticipated to appropriately utilize new or upgraded facilities, our costs and financial performance could be negatively affected.

16


Our distribution agreements with our allied brands could be terminated.
Approximately 84% of our 2013 Packaged Beverages net sales of branded products come from our owned and licensed brands, with the remaining from the distribution of third party brands such as FIJI, Big Red, AriZona, Hydrive, Vita Coco and Neuro. We are subject to a risk of our allied brands terminating their distribution agreements with us, which could negatively affect our business and financial performance.
We depend on key information systems and third party service providers.
We depend on key information systems to accurately and efficiently transact our business, provide information to management and prepare financial reports. We rely on third party providers for a number of key information systems and business processing services, including hosting our primary data center and processing various benefit-related accounting and transactional services. These systems and services are vulnerable to interruptions or other failures resulting from, among other things, natural disasters, terrorist attacks, software, equipment or telecommunications failures, processing errors, computer viruses, hackers, other security issues or supplier defaults. Security, backup and disaster recovery measures may not be adequate or implemented properly to avoid such disruptions or failures. Any disruption or failure of these systems or services could cause substantial errors, processing inefficiencies, security breaches, inability to use the systems or process transactions, loss of customers or other business disruptions, all of which could negatively affect our business and financial performance.
We could lose key personnel or may be unable to recruit qualified personnel.
Our performance significantly depends upon the continued contributions of our executive officers and key employees, both individually and as a group, and our ability to retain and motivate them. Our officers and key personnel have many years of experience with us and in our industry and it may be difficult to replace them. If we lose key personnel or are unable to recruit qualified personnel, our operations and ability to manage our business may be adversely affected. We do not have "key person" life insurance for any of our executive officers or key employees.
Changes in accounting standards could affect our reported financial results.
We are subject to changes in accounting rules and interpretations. The Financial Accounting Standards Board is currently in the process of deliberating changes to a number of existing standards governing a variety of areas. Certain of these proposed standards, particularly the proposed standard governing the accounting for leases, if and when effective, could have a material impact on our consolidated financial statements. Additionally, compliance with such requirements may result in increased selling, general and administrative expenses or capital expenditures and the associated depreciation expense. Refer to Note 2 of the Notes to our Audited Consolidated Financial Statements in Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K for a discussion of recently issued accounting standards and recently adopted provisions of U.S. GAAP.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
As of December 31, 2013, we owned or leased 155 administrative, manufacturing and principal distribution centers and warehouse facilities operating across the Americas. Our corporate headquarters are located in Plano, Texas, in a facility that we own.

17


The following table summarizes our significant properties by geography and by operating segment:
 
Packaged
 
Beverage
 
Latin America
 
 
 
Beverages
 
Concentrates
 
Beverages
 
 
 
Owned
 
Leased
 
Owned
 
Leased
 
Owned
 
Leased
 
Total
United States:
 
 
 
 
 
 
 
 
 
 
 
 
 
Office buildings(1)
1

 
8

 
1

 

 

 

 
10

Manufacturing facilities
11

 
6

 
1

 

 

 

 
18

Principal distribution centers and warehouse facilities
42

 
71

 

 

 

 

 
113

 
54

 
85

 
2

 

 

 

 
141

Mexico and Canada:
 
 
 
 
 
 
 
 
 
 
 
 
 
Office buildings

 
1

 

 

 

 
2

 
3

Manufacturing facilities(2)

 

 

 

 
3

 

 
3

Principal distribution centers and warehouse facilities

 

 

 

 
3

 
5

 
8

 

 
1

 

 

 
6

 
7

 
14

Total
54

 
86

 
2

 

 
6

 
7

 
155

____________________________
(1) The office building owned by our Beverage Concentrates operating segment is our corporate headquarters located in Plano, Texas.
(2) The three manufacturing facilities owned by Latin America Beverages operating segment includes the manufacturing facility leased to our joint venture with Acqua Minerale San Benedetto.
We believe our facilities in the U.S. and Mexico are well-maintained and adequate, that they are being appropriately utilized in line with past experience and that they have sufficient production capacity for their present intended purposes. The extent of utilization of such facilities varies based on seasonal demand for our products. It is not possible to measure with any degree of certainty or uniformity the productive capacity and extent of utilization of these facilities. We periodically review our space requirements, and we believe we will be able to acquire new space and facilities as and when needed on reasonable terms. We also look to consolidate and dispose or sublet facilities we no longer need, as and when appropriate.
ITEM 3. LEGAL PROCEEDINGS
We are occasionally subject to litigation or other legal proceedings relating to our business. See Note 20 of the Notes to our Audited Consolidated Financial Statements for more information related to commitments and contingencies, which is incorporated herein by reference.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.

18


PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
In the United States, our common stock is listed and traded on the New York Stock Exchange under the symbol "DPS". Information as to the high and low sales prices of our stock for the two years ended December 31, 2013 and 2012, and the frequency and amount of dividends declared on our stock during these periods, is set forth in Note 24 of the Notes to our Audited Consolidated Financial Statements.
As of February 14, 2014, there were approximately 15,000 stockholders of record of our common stock. This figure does not include a substantially greater number of holders whose shares are held of record in "street name".
The information that will be included under the principal heading "Equity Compensation Plan Information" in our definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 15, 2014, to be filed with the Securities and Exchange Commission, is incorporated herein by reference.
During the years ended December 31, 2013, we issued 313,105 unregistered shares of our common stock (the "Issued Shares") in connection with the acquisition of the assets of Dr. Pepper/7-Up Bottling Company of the West, a Nevada corporation, pursuant to an Agreement and Plan of Reorganization, dated February 25, 2013. In connection with this issuance, we filed a registration statement on Form S-3ASR to register the Issued Shares under the Securities Act of 1933, as amended and to allow the selling securityholders named therein to resell, from time to time, the Issued Shares. We will not receive any of the proceeds from the resale of the Issued Shares by the selling securityholders. For the years ended December 31, 2012 and 2011, we did not sell any equity securities that were not registered under the Securities Act of 1933, as amended.
DIVIDEND POLICY
Our Board of Directors (our "Board") declared aggregate dividends of $1.52, $1.36 and $1.21 per share on outstanding common stock during the years ended December 31, 2013, 2012 and 2011, respectively.
We expect to return our excess cash flow to our stockholders from time to time through our common stock repurchase program described below or the payment of dividends. However, there can be no assurance that share repurchases will occur or future dividends will be declared and paid. The share repurchase program and declaration and payment of future dividends, the amount of any such share repurchases or dividends and the establishment of record and payment dates for dividends, if any, are subject to final determination by our Board after its review of our then current strategy and financial performance and position, among other things.

19


COMMON STOCK REPURCHASES
During the years ended December 31, 2011, 2010, and 2009 our Board authorized the repurchase of an aggregate amount of up to $3 billion of our outstanding common stock through the following actions:
$200 million of share repurchases were authorized on November 20, 2009;
$800 million of share repurchases were authorized on February 24, 2010;
$1 billion of share repurchases were authorized on July 12, 2010; and
$1 billion of share repurchases were authorized on November 17, 2011.
We repurchased approximately 8.7 million shares of our common stock, valued at approximately $400 million, in the year ended December 31, 2013. Our share repurchase activity, on a monthly basis, for the quarter ended December 31, 2013 was as follows (in thousands, except per share data):
Period
 
Number of Shares Purchased
 
Average Price Paid per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)
 
Maximum Dollar Value of Shares that May Yet be Purchased Under Publicly Announced Plans or Programs
October 1, 2013 – October 31, 2013
 
1,103

 
$
44.27

 
1,103

 
$
680,724

November 1, 2013 – November 30, 2013
 
576

 
47.63

 
576

 
653,295

December 1, 2013 – December 31, 2013
 
1,684

 
48.14

 
1,684

 
572,225

For the quarter ended December 31, 2013
 
3,363

 
46.78

 
3,363

 
 
____________________________
(1)
As previously disclosed, the Board has authorized us to purchase an aggregate amount of up to $3,000 million of our outstanding common stock. This column discloses the number of shares purchased pursuant to these programs during the indicated time periods. As of December 31, 2013, there was a remaining balance of $572 million authorized for repurchase that had not been utilized.

20


COMPARISON OF TOTAL STOCKHOLDER RETURN
The following performance graph compares our cumulative total returns with the cumulative total returns of the Standard & Poor's 500 and a peer group index. The graph assumes that $100 was invested on December 31, 2008, with dividends reinvested quarterly.

Comparison of Total Returns
Assumes Initial Investment of $100
The Peer Group Index consists of the following companies: The Coca-Cola Company ("Coca-Cola"), PepsiCo, Inc. ("PepsiCo"), Monster Beverage Corporation, The Cott Corporation and National Beverage Corporation. We believe that these companies help to convey an accurate assessment of our performance as compared to the industry.

21


ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected historical financial data for the years ended December 31, 2013, 2012, 2011, 2010 and 2009. All the selected historical financial data has been derived from our Audited Consolidated Financial Statements and is stated in millions of dollars except for per share information.
You should read this information along with the information included in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and our Audited Consolidated Financial Statements and the related Notes thereto included elsewhere in this Annual Report on Form 10-K.
 
Year Ended December 31,
 
2013
 
2012
 
2011
 
2010
 
2009
 
(in millions, except per share data)
Statements of Income Data:
 

 
 

 
 

 
 

 
 

Net sales
$
5,997

 
$
5,995

 
$
5,903

 
$
5,636

 
$
5,531

Gross profit
3,498

 
3,495

 
3,418

 
3,393

 
3,297

Income from operations
1,046

 
1,092

 
1,024

 
1,025

 
1,085

Net income
624

 
629

 
606

 
528

 
555

Basic earnings per share(1)
$
3.08

 
$
2.99

 
$
2.77

 
$
2.19

 
$
2.18

Diluted earnings per share(1)
3.05

 
2.96

 
2.74

 
2.17

 
2.17

Dividends declared per share
1.52

 
1.36

 
1.21

 
0.90

 
0.15

Statements of Cash Flows Data:
 
 
 
 
 
 
 
 
 
Cash provided by (used in):
 
 
 
 
 
 
 
 
 
Operating activities(2)
$
866

 
$
482

 
$
783

 
$
2,535

 
$
865

Investing activities
(195
)
 
(217
)
 
(240
)
 
(225
)
 
(251
)
Financing activities
(880
)
 
(603
)
 
(152
)
 
(2,280
)
 
(554
)

 
As of December 31,
 
2013
 
2012
 
2011
 
2010
 
2009
 
(in millions, except per share data)
Balance Sheet Data:
 
 
 
 
 
 
 
 
 
Total assets
8,201

 
8,928

 
$
9,283

 
$
8,776

 
$
8,638

Short-term borrowings and current portion of long-term obligations
66

 
250

 
452

 
404

 

Long-term obligations
2,508

 
2,554

 
2,256

 
1,687

 
2,960

Other non-current liabilities(2)
2,386

 
2,862

 
2,849

 
3,375

 
1,775

Total stockholders’ equity
2,277

 
2,280

 
2,263

 
2,459

 
3,187

____________________________
(1)
The weighted average number of common shares outstanding used in the calculation of earnings per share ("EPS") was impacted by the repurchase and retirement of DPS common stock. For the years ended December 31, 2013, 2012, 2011 and 2010, we repurchased and retired 8.7 million shares, 9.5 million shares, 13.7 million shares and 30.8 million shares, respectively. No shares were repurchased during the year ended December 31, 2009.
(2)
The 2010 other non-current liabilities for the fiscal year reflects non-current deferred revenue of $1,515 million due to the receipt of separate one-time nonrefundable cash payments from PepsiCo and Coca-Cola recorded as deferred revenue, which is included within operating activities on the Consolidated Statement of Cash Flows.

22


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 
You should read the following discussion in conjunction with our Audited Consolidated Financial Statements and the related Notes thereto included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that are based on management's current expectations, estimates and projections about our business and operations. Our actual results may differ materially from those currently anticipated and expressed in such forward-looking statements as a result of various factors including the factors we describe under "Special Note Regarding Forward-Looking Statements", "Risk Factors" and elsewhere in this Annual Report on Form 10-K.
References in the following discussion to "we", "our", "us", "DPS" or "the Company" refer to Dr Pepper Snapple Group, Inc. and all entities included in our Audited Consolidated Financial Statements. Cadbury plc and Cadbury Schweppes plc are hereafter collectively referred to as "Cadbury", unless otherwise indicated. Kraft Foods Inc. acquired Cadbury on February 2, 2010.
On October 1, 2012, Kraft Foods, Inc. spun-off its North American grocery business to its shareholders and changed its name to Mondelēz International, Inc. ("Mondelēz").
The periods presented in this section are the years ended December 31, 2013, 2012 and 2011, which we refer to as "2013", "2012" and "2011", respectively.
OVERVIEW
We are a leading integrated brand owner, manufacturer and distributor of non-alcoholic beverages in the United States ("U.S."), Canada and Mexico with a diverse portfolio of flavored carbonated soft drinks ("CSDs") and non-carbonated beverages ("NCBs"), including ready-to-drink teas, juices, juice drinks and mixers. Our brand portfolio includes popular CSD brands such as Dr Pepper, Sunkist soda, 7UP, A&W, Canada Dry, Crush, Squirt, Peñafiel and Schweppes, and NCB brands such as Snapple, Mott's, Hawaiian Punch, Clamato, Rose's and Mr & Mrs T mixers. Our largest brand, Dr Pepper, is a leading flavored CSD in the U.S. according to The Nielsen Company. We have some of the most recognized beverage brands in North America, with significant consumer awareness levels and long histories that evoke strong emotional connections with consumers. 
We operate as an integrated brand owner, manufacturer and distributor through our three segments. We believe our integrated business model strengthens our route-to-market and provides opportunities for net sales and profit growth through the alignment of the economic interests of our brand ownership and our manufacturing and distribution businesses through both our Direct Store Delivery ("DSD") system and our Warehouse Direct ("WD") delivery system. Our integrated business model enables us to be more flexible and responsive to the changing needs of our large retail customers and allows us to more fully leverage our scale and reduce costs by creating greater geographic manufacturing and distribution coverage.
We operate primarily in the U.S., Mexico and Canada and we also distribute our products in the Caribbean. In 2013, 88% of our net sales were generated in the U.S., 4% in Canada and 8% in Mexico and the Caribbean.
UNCERTAINTIES AND TRENDS AFFECTING OUR BUSINESS
We believe the North American Liquid Refreshment Beverage ("LRB") market is influenced by certain key trends and uncertainties. Some of these items, such as increased health consciousness and changes in economic factors, have created continued category headwinds for our CSDs during the year ended December 31, 2013 and have unfavorably impacted our sales volumes compared to the prior year. The key trends and uncertainties that could affect our business include:
Increased health consciousness. Consumers are increasingly becoming more concerned about health and wellness, focusing on caloric intake and sugar content in both regular CSDs and juices and the use of artificial sweeteners in diet CSDs. We believe the main beneficiaries of this trend include naturally sweetened, low calorie drinks, all natural and organic beverages, ready-to-drink teas and bottled waters.
Increased government regulation. Government agencies, as a result of concerns about the public health consequences and health care costs associated with obesity, have been proposing and, in some cases, enacting new taxes or regulations on sugar-sweetened beverages. Any changes of regulations or imposed taxes could reduce demand and/or cause us to raise our prices.
Changes in economic factors.  We believe changes in economic factors, including forms of government assistance such as the Supplemental Nutrition Assistance Program, could impact consumers' purchasing power which may result in a decrease in purchases of our products.

23


Changes in consumer preferences.  We are impacted by shifting consumer demographics and needs. We believe marketing and product innovations that target fast growing population segments, such as the Hispanic community in the U.S., could drive market growth. Additionally, as more consumers are faced with a busy and on-the-go lifestyle, sales of single-serve beverages could increase, which typically have higher margins.
Increased competition in the LRB market.  A number of our competitors are large corporations with significant financial resources. These competitors can use their resources and scale to rapidly respond to competitive pressures and changes in consumer preferences by introducing new products, reducing prices or increasing promotional activities, which could reduce the demand for our products.
Product and packaging innovation.  We believe brand owners and bottling companies will continue to create new products and packages, such as beverages with new ingredients and new premium flavors and innovative convenient packaging, that address changes in consumer tastes and preferences.
Changing retailer landscape.  As retailers continue to consolidate, we believe retailers will support consumer product companies that can provide an attractive portfolio of products, a strong value proposition and efficient delivery.
Volatility in the costs of raw materials.  The costs of a substantial portion of the raw materials used in the beverage industry are dependent on commodity prices for aluminum, corn, resin, diesel, natural gas, pulp and other commodities. We are also dependent on commodity prices for apples related to our applesauce production. Commodity price volatility has exerted pressure on industry margins and operating results.
As a result of these uncertainties and other factors, we believe net sales for the year ending December 31, 2014 could be up only 1% as compared to the year ended December 31, 2013.
Refer to Item 1A, "Risk Factors" of this Annual Report on Form 10-K for additional information about risks and uncertainties facing our Company.
SEASONALITY
The beverage market is subject to some seasonal variations. Our beverage sales are generally higher during the warmer months and also can be influenced by the timing of holidays as well as weather fluctuations.
SEGMENTS
We report our business in three operating segments:
The Beverage Concentrates segment reflects sales of our branded concentrates and syrup to third party bottlers primarily in the U.S. and Canada. Most of the brands in this segment are CSD brands.
The Packaged Beverages segment reflects sales in the U.S. and Canada from the manufacture and distribution of finished beverages and other products, including sales of our own brands and third party brands, through both DSD and WD.
The Latin America Beverages segment reflects sales in the Mexico, Caribbean and other international markets from the manufacture and distribution of concentrates, syrup and finished beverages.
Segment results are based on management reports. Net sales and segment operating profit ("SOP") are the significant financial measures used to assess the operating performance of our operating segments.
VOLUME
In evaluating our performance, we consider different volume measures depending on whether we sell beverage concentrates or finished beverages.
Beverage Concentrates Sales Volume
In our Beverage Concentrates segment, we measure our sales volume in two ways: (1) "concentrate case sales" and (2) "bottler case sales." The unit of measurement for both concentrate case sales and bottler case sales equals 288 fluid ounces of finished beverage, the equivalent of 24 twelve ounce servings.

24


Concentrate case sales represent units of measurement for concentrates sold by us to our bottlers and distributors. A concentrate case is the amount of concentrate needed to make one case of 288 fluid ounces of finished beverage. It does not include any other component of the finished beverage other than concentrate. Our net sales in our concentrate businesses are based on our sales of concentrate cases.
Although net sales in our concentrate businesses are based on concentrate case sales, we believe that bottler case sales are also a significant measure of our performance because they measure sales of packaged beverages into retail channels.
Packaged Beverages Sales Volume
In our Packaged Beverages segment, we measure volume as case sales to customers. A case sale represents a unit of measurement equal to 288 fluid ounces of packaged beverage sold by us. Case sales include both our owned brands and certain brands licensed to and/or distributed by us.
Volume in Bottler Case Sales
In addition to sales volume, we measure volume in bottler case sales ("volume (BCS)") as sales of packaged beverages, in equivalent 288 fluid ounce cases, sold by us and our bottling partners to retailers and independent distributors. Our contract manufacturing sales are not included or reported as part of volume (BCS).
Bottler case sales and concentrates and packaged beverage sales volumes are not equal during any given period due to changes in bottler concentrates inventory levels, which can be affected by seasonality, bottler inventory and manufacturing practices and the timing of price increases and new product introductions.

25


RESULTS OF OPERATIONS
Executive Summary - 2013 Financial Overview and Recent Developments
Net sales totaled $5,997 million for the year ended December 31, 2013, an increase of $2 million from the year ended December 31, 2012.
Net income for the year ended December 31, 2013 was $624 million, compared to $629 million for the year ended December 31, 2012, a decrease of $5 million, or approximately 1%.
Diluted earnings per share was $3.05 for the year ended December 31, 2013 and $2.96 for the year ago period, an increase of $0.09, or approximately 3%.
Earnings for the year ended December 31, 2013 included a $33 million non-cash increase in net income associated with the conclusion of an Internal Revenue Service ("IRS") audit and a $12 million non-cash reduction in net income associated with a change in Canadian tax law. These two items increased diluted earnings per share by $0.10 during the year ended December 31, 2013.
Earnings for the year ended December 31, 2013 also included a $56 million non-cash charge related to our intention to withdraw from the Soft Drink Industry Local Union 710 Pension Fund ("Local 710"), which decreased diluted earnings per share by $0.17 during the year ended December 31, 2013.
During 2013, our Board of Directors (our "Board") declared aggregate dividends of $1.52 per share on outstanding common stock, as compared to $1.36 per share on outstanding common stock during 2012. Dividends declared per share for the year ended December 31, 2013 increased approximately 12%.
On November 13, 2013, Standard & Poor's ("S&P") raised our rating from BBB with a positive outlook to BBB+ with a stable outlook.
During the years ended December 31, 2013 and 2012, we repurchased 8.7 million and 9.5 million shares of our common stock, respectively, valued at approximately $400 million each year.
During the first quarter of 2014, our Board declared a dividend of $0.41 per share, which will be paid on April 4, 2014, to shareholders of record as of March 17, 2014. The dividend declared during the first quarter of 2014 increased approximately 8% compared to the dividend declared in the previous quarter.
References in the financial tables to percentage changes that are not meaningful are denoted by "NM."


26


Year Ended December 31, 2013 Compared to Year Ended December 31, 2012
Consolidated Operations
The following table sets forth our consolidated results of operations for the years ended December 31, 2013 and 2012 (dollars in millions, except per share data):
 
For the Year Ended December 31,
 
 
 
2013
 
2012
 
Percentage
 
Dollars
 
Percent
 
Dollars
 
Percent
 
Change
Net sales
$
5,997

 
100.0
 %
 
$
5,995

 
100.0
 %
 
 %
Cost of sales
2,499

 
41.7

 
2,500

 
41.7

 
 
Gross profit
3,498

 
58.3

 
3,495

 
58.3

 

Selling, general and administrative expenses
2,272

 
37.9

 
2,268

 
37.8

 
 
Multi-employer pension plan withdrawal
56

 
2.2

 

 

 
 
Depreciation and amortization
115

 
1.9

 
124

 
2.1

 
 
Other operating expense, net
9

 
0.2

 
11

 
0.2

 
 
Income from operations
1,046

 
17.4

 
1,092

 
18.2

 
(4
)
Interest expense
123

 
2.0

 
125

 
2.1

 
 
Interest income
(2
)
 

 
(2
)
 

 
 
Other expense (income), net
383

 
6.4

 
(9
)
 
(0.2
)
 
 
Income before (benefit) provision for income taxes and equity in earnings of unconsolidated subsidiaries
542

 
9.0

 
978

 
16.3

 
NM

(Benefit) provision for income taxes
(81
)
 
(1.4
)
 
349

 
5.8

 
 
Income before equity in earnings of unconsolidated subsidiaries
623

 
10.4

 
629

 
10.5

 
 
Equity in earnings of unconsolidated subsidiaries, net of tax
1

 

 

 

 
 
Net income
$
624

 
10.4
 %
 
$
629

 
10.5
 %
 
(1
)%
 
 
 
 
 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
 
 
 
 
Basic
$
3.08

 
NM

 
$
2.99

 
NM

 
3
 %
Diluted
$
3.05

 
NM

 
$
2.96

 
NM

 
3
 %
Volume (BCS). Volume (BCS) decreased 2% for the year ended December 31, 2013 compared with the year ended December 31, 2012. In the U.S. and Canada, volume declined 2%, and in Mexico and the Caribbean, volume increased 3%, compared with the year ago period. Both CSD volume and NCB volume declined 2%.
In CSDs, volumes were unfavorably impacted by continued category headwinds which included increased consumer concerns about health and wellness. Dr Pepper volume declined 2%. Our Core 4 brands, which included the impact of the launch of our Core 4 TEN products, decreased 1% compared to the year ago period. This result was driven by a a 5% decrease in 7UP, a 7% decline in Sunkist soda and a 2% decrease in A&W, partially offset by a 6% increase in Canada Dry. Crush, Squirt and RC Cola declined 7%, 4% and 4%, respectively. Sun Drop declined double-digits. Other brands in total declined 3%. These decreases were partially offset by growth of 11% in Peñafiel as a result of product and package innovation and a 6% increase in Schweppes reflecting distribution gains in our seltzer water and growth in the ginger ale category.
In NCBs, decreases were driven by a 9% decrease in Hawaiian Punch as a result of lower promotional activity and declines within the category and an 8% decline in other brands. The decline was partially offset by a 2% increase in Snapple as a result of package and product innovation and a 3% increase in Mott's due to distribution gains in our juice and sauce categories. Our water category increased 3%, led by Aguafiel. Clamato increased 6%.
Net Sales. Net sales increased $2 million for the year ended December 31, 2013 compared with the year ended December 31, 2012. The increase was attributable to favorable mix, net pricing increases and favorable foreign currency translation, substantially offset by lower branded sales volumes and an unfavorable comparison of trade adjustments.

27


Gross Profit. Gross profit increased $3 million for the year ended December 31, 2013 compared with the year ended December 31, 2012. Gross margin was 58.3% for both years ended December 31, 2013 and 2012. Significant activity within the gross margin included the $58 million favorable comparison in our LIFO inventory provision, driven by the higher prices of apples in the prior year, and increases in our net price realization. These favorable changes were offset by increases in our commodity costs, led by apples and sweeteners, the $30 million unfavorable comparison for the mark-to-market activity on commodity derivative contracts and unfavorable mix due to a higher mix of finished goods rather than concentrates, as well as package and product mix. The change in our LIFO inventory provision for the year ended December 31, 2013 was a $39 million reduction in the provision versus a $19 million increase in the provision for the year ended December 31, 2012. The mark-to-market activity on commodity derivative contracts for the year ended December 31, 2013 was $15 million in unrealized losses versus $15 million in unrealized gains in the year ago period.
Selling, General and Administrative Expenses. SG&A expenses increased $4 million for the year ended December 31, 2013 compared with the prior period. The increase was primarily the result of $7 million in workforce reduction costs, incremental operating costs associated with the acquisition of certain assets of Dr. Pepper/7-UP Bottling Company of the West ("DP/7UP West") , increased marketing investments and the unfavorable comparison for the mark-to-market activity on commodity derivative contracts. These increases were partially offset by lower labor and benefit costs, a $6 million favorable adjustment in 2013 to the legal provision associated with litigation against The American Bottling Group as a result of settlement agreements with certain plaintiffs ("ABC litigation") and lower logistics costs.
Multi-employer Pension Plan Withdrawal. We recognized a non-cash charge of $56 million related to our intention to withdraw from Local 710. Refer to Note 14 of the Notes to our Audited Consolidated Financial Statements for further information on this charge.
Income from Operations. Income from operations decreased $46 million to $1,046 million for the year ended December 31, 2013, principally due to the non-cash charge for the multi-employer pension plan withdrawal and an increase in SG&A expenses partially offset by the decline in depreciation and amortization driven by the favorable comparison to the $8 million depreciation adjustment recorded in the prior year.
Other Expense, Net and (Benefit) Provision for Income Taxes. We have historically recorded indemnification income from Mondelēz under the Tax Sharing and Indemnification Agreement ("Tax Indemnity Agreement") as other expense (income), net in the Consolidated Statements of Income. Due to the completion of the IRS audit for our 2006-2008 federal income tax returns in August 2013, we recognized an income tax benefit of $463 million primarily related to decreasing our liability for unrecognized tax benefits and $430 million of other expense, net, as we no longer anticipate collecting amounts from Mondelēz. Additionally, in June 2013, a bill was enacted by the Canadian government, which reduced amounts amortized for income tax purposes. As a result, we recognized $38 million of indemnity income due to the reduction of our long-term liability to Mondelēz and $50 million of income tax expense for the reduction of our tax assets.
The following table excludes these amounts discussed above from our other expense (income), net, (loss) income before (benefit) provision for income taxes and equity in earnings of unconsolidated subsidiaries and (benefit) provision for income taxes lines within our Consolidated Statements of Income. We have presented this table as we believe the effect of those items on these lines and on our effective tax rate for the year ended December 31, 2013 are not meaningful as reported.
 
For the Year Ended December 31, 2013
 
 
(in millions)
As reported
 
Completion of the IRS audit in August 2013
 
Enactment of the Canadian bill in June 2013
 
As reported excluding tax and indemnity items
 
For the Year Ended December 31, 2012
Other expense (income), net
$
383

 
$
(430
)
 
$
38

 
$
(9
)
 
$
(9
)
Income before (benefit) provision for income taxes and equity in earnings of unconsolidated subsidiaries
542

 
430

 
(38
)
 
934

 
978

(Benefit) provision for income taxes
(81
)
 
463

 
(50
)
 
332

 
349

 
 
 
 
 
 
 
 
 
 
Effective tax rate
(14.9
)%
 
 
 
 
 
35.5
%
 
35.7
%

28


Results of Operations by Segment
The following tables set forth net sales and SOP for our segments for the year ended December 31, 2013 and 2012, as well as the other amounts necessary to reconcile our total segment results to our consolidated results presented in accordance with U.S. GAAP (in millions):
 
For the Year Ended
 
December 31,
 
2013
 
2012
Segment Results — Net sales
 
 
 
Beverage Concentrates
$
1,229

 
$
1,221

Packaged Beverages
4,306

 
4,358

Latin America Beverages
462

 
416

Net sales
$
5,997

 
$
5,995

 
 
 
 
 
For the Year Ended
 
December 31,
 
2013
 
2012
Segment Results — SOP
 
 
 
Beverage Concentrates
$
778

 
$
774

Packaged Beverages
525

 
539

Latin America Beverages
61

 
51

Total SOP
1,364

 
1,364

Unallocated corporate costs
309

 
261

Other operating expense, net
9

 
11

Income from operations
1,046

 
1,092

Interest expense, net
121

 
123

Other expense (income), net
383

 
(9
)
Income before provision for income taxes and equity in earnings of unconsolidated subsidiaries
$
542

 
$
978

BEVERAGE CONCENTRATES
The following table details our Beverage Concentrates segment's net sales and SOP for the years ended December 31, 2013 and 2012 (in millions):
 
For the Year Ended
 
 
 
December 31,
 
 
 
2013
 
2012
 
Change
Net sales
$
1,229

 
$
1,221

 
$
8

SOP
778

 
774

 
4

Net Sales. Net sales increased $8 million for the year ended December 31, 2013, compared with the year ended December 31, 2012. The increase was due to an increase in concentrate prices, favorable product mix and lower discounts, which were largely offset by a 4% decline in concentrate case sales.
SOP. SOP increased $4 million for the year ended December 31, 2013, compared with the year ended December 31, 2012, primarily due to the gross margin impact of higher net sales and lower labor and benefit costs, partially offset by a higher transfer pricing allocation and $5 million of higher marketing investments.

29


Volume (BCS). Volume (BCS) decreased 2% as a result of continued category headwinds for the year ended December 31, 2013 compared with the year ended December 31, 2012, primarily driven by a 2% decline in Dr Pepper and a 7% decrease in Crush. Other drivers of the decline include a 7% decline in RC Cola, a 6% decrease in Sun Drop and a 6% decline in Squirt. These declines were partially offset by a 6% increase in Schweppes reflecting distribution gains in our seltzer water and growth in the ginger ale category. Our Core 4 brands, which included the impact of the launch of our Core 4 TEN products, were flat compared to the prior year as a result of a 7% decline in Sunkist soda, a 4% decrease in 7UP and a 3% decline in A&W, offset by a 4% increase in Canada Dry.
PACKAGED BEVERAGES
The following table details our Packaged Beverages segment's net sales and SOP for the years ended December 31, 2013 and 2012 (in millions):
 
For the Year Ended
 
 
 
December 31,
 
 
 
2013
 
2012
 
Change
Net sales
$
4,306

 
$
4,358

 
$
(52
)
SOP
525

 
539

 
(14
)
Volume. Total sales volume decreased 3% for the year ended December 31, 2013 compared with the year ended December 31, 2012. Lower NCB volumes, CSD volumes and contract manufacturing each decreased our total segment sales volume by 1%.
Within CSDs, volume declined 2% for the year ended December 31, 2013 compared with the year ended December 31, 2012, as a result of continued category headwinds. Volume for our Core 4 brands, which includes the impact of the launch of our Core 4 TEN products, decreased 1% for the year ended December 31, 2013, led by a 7% decline in Sunkist soda, a 3% decrease in 7UP and an 1% decline in A&W, partially offset by a double digit increase in Canada Dry. Dr Pepper volumes decreased 3% for the year ended December 31, 2013. Sun Drop declined by double-digits, while Squirt declined 2%. Our other brands decreased 6% for the year ended December 31, 2013. These declines were partially offset by a 3% increase in RC Cola which included the launch of the RC TEN product.
Within NCBs, volume decreased 4%, driven primarily by a 10% decline in Hawaiian Punch as a result of declines within the category and lower promotional activity. Our other brands decreased 8%, led by distribution losses in AriZona. These decreases were partially offset by a 3% increase in Mott's as a result of distribution gains in our juice and sauce categories and increased promotional activity, a 2% increase in our water category and a 2% increase in Clamato. Snapple was flat for the period.
Net Sales. Net sales decreased $52 million for the year ended December 31, 2013 compared with the year ended December 31, 2012. Net sales decreased due to a decline in our sales volumes and an unfavorable comparison of trade adjustments, which were partially offset by favorable mix and net pricing increases led by Mott's.
SOP. SOP decreased $14 million for the year ended December 31, 2013, compared with the year ended December 31, 2012. The primary factors driving the decrease in SOP included a $56 million non-cash charge related to our intention to withdraw from the Local 710 multi-employer pension plan and higher commodity costs, led by apples, which were partially offset by a $56 million favorable comparison in our LIFO inventory provision. Other drivers of SOP include the gross margin impact of lower net sales, partially offset by ongoing productivity improvements, lower labor and benefit costs, the favorable comparison to the $8 million depreciation adjustment recorded in the prior year, lower logistics costs and a $6 million favorable adjustment in 2013 to the legal provision associated with the ABC litigation.

30


LATIN AMERICA BEVERAGES
The following table details our Latin America Beverages segment's net sales and SOP for the years ended December 31, 2013 and 2012 (in millions):
 
For the Year Ended
 
 
 
December 31,
 
 
 
2013
 
2012
 
Change
Net sales
$
462

 
$
416

 
$
46

SOP
61

 
51

 
10

Volume. Sales volume increased 3% for the year ended December 31, 2013 as compared with the year ended December 31, 2012. The increase in volume was led by a double-digit increase in Peñafiel as a result of product and package innovation and a 6% increase in Aguafiel due to increased promotional activity. Clamato increased 8% while Dr Pepper increased by double-digits. Our other brands in total increased 7%. These increases in sales volume were partially offset by a 4% decline in Squirt as a result of higher pricing and inventory reductions by third party bottlers, a double-digit decline in 7UP and a 5% decrease in Crush.
Net Sales. Net sales increased $46 million for the year ended December 31, 2013 compared with the year ended December 31, 2012. Net sales increased as a result of favorable product mix, increased sales volumes and $12 million of favorable foreign currency translation.
SOP. SOP increased $10 million for the year ended December 31, 2013 compared with the year ended December 31, 2012, primarily due to the gross margin impact of favorable product mix, increased sales volumes and ongoing productivity improvements. These favorable drivers were partially offset by increases in people costs, marketing investments, other manufacturing costs, commodity costs, which were led by sweeteners, and higher logistics costs.

31


Year Ended December 31, 2012 Compared to Year Ended December 31, 2011
Consolidated Operations
The following table sets forth our consolidated results of operations for the years ended December 31, 2012 and 2011 (dollars in millions, except per share data):
 
For the Year Ended December 31,
 
 
 
2012
 
2011
 
Percentage
 
Dollars
 
Percent
 
Dollars
 
Percent
 
Change
Net sales
$
5,995

 
100.0
 %
 
$
5,903

 
100.0
 %
 
2
%
Cost of sales
2,500

 
41.7

 
2,485

 
42.1

 
 
Gross profit
3,495

 
58.3

 
3,418

 
57.9

 
2

Selling, general and administrative expenses
2,268

 
37.8

 
2,257

 
38.3

 
 
Depreciation and amortization
124

 
2.1

 
126

 
2.1

 
 
Other operating expense, net
11

 
0.2

 
11

 
0.2

 
 
Income from operations
1,092

 
18.2

 
1,024

 
17.3

 
7

Interest expense
125

 
2.1

 
114

 
1.9

 
 
Interest income
(2
)
 

 
(3
)
 
(0.1
)
 
 
Other income, net
(9
)
 
(0.2
)
 
(12
)
 
(0.2
)
 
 
Income before provision for income taxes and equity in earnings of unconsolidated subsidiaries
978

 
16.3

 
925

 
15.7

 
6

Provision for income taxes
349

 
5.8

 
320

 
5.5

 
 
Income before equity in earnings of unconsolidated subsidiaries
629

 
10.5

 
605

 
10.2

 
 
Equity in earnings of unconsolidated subsidiaries, net of tax

 

 
1

 

 
 
Net income
$
629

 
10.5
 %
 
$
606

 
10.3
 %
 
4
%
 
 
 
 
 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
 
 
 
 
Basic
$
2.99

 
NM

 
$
2.77

 
NM

 
8
%
Diluted
$
2.96

 
NM

 
$
2.74

 
NM

 
8
%
Volume (BCS). Volume (BCS) decreased 1% for the year ended December 31, 2012 compared with the year ended December 31, 2011. In the U.S. and Canada, volume declined 1%, and in Mexico and the Caribbean, volume increased 2%, in each case compared with the year ago period. CSD volume was flat, while NCB volume decreased 5%.
In CSDs, Dr Pepper volume was flat due to the growth of Dr Pepper TEN, which launched in the fourth quarter of 2011, and the impact of additional fountain availability. These increases were offset by declines in Cherry and diet Dr Pepper. Our Core 4 brands increased 1% compared to the year ago period as a mid single-digit increase in Canada Dry was partially offset by low single-digit declines in 7UP and Sunkist soda. Peñafiel increased 5% as a result of package innovation. Schweppes grew 5% reflecting growth in the ginger ale category, while Squirt increased 1%. Sun Drop declined double-digits due to cycling the national launch of the brand in the prior year while Crush decreased 4%. Our other CSD brands decreased 3% for the year ended December 31, 2012, led by Welch's.
Decreases in NCBs were driven by a 17% decrease in Hawaiian Punch as a result of price increases and a 7% decrease in Mott's due to net price increases and lower promotional activity. These decreases were partially offset by a 15% increase in Clamato, a 3% increase in Snapple as a result of package and flavor innovation and a 2% increase in our water category. Our water category was led by strong performances by Vita Coco, Deja Blue and FIJI in our Packaged Beverages segment, partially offset by declines in Aguafiel as a result of lower promotional activity in our Latin America Beverages segment.
Net Sales. Net sales increased $92 million, or approximately 2%, for the year ended December 31, 2012 compared with the year ended December 31, 2011. The increase was attributable to price increases and favorable mix. These drivers were partially offset by lower sales volumes and the unfavorable impact of foreign currency.

32


Gross Profit. Gross profit increased $77 million, or approximately 2%, for the year ended December 31, 2012 compared with the year ended December 31, 2011. Gross margin of 58.3% for the year ended December 31, 2012 was higher than the 57.9% gross margin for the year ended December 31, 2011. Significant factors causing the increase in gross margin were increases in our net price realization and $15 million of unrealized gains during the year ended December 31, 2012 for the mark-to-market activity on commodity derivative contracts, which were partially offset by higher costs for apples, flavors, apple juice concentrate, packaging, sweeteners and other commodities. The mark-to-market activity on commodity derivative contracts generated $22 million of unrealized losses for the year ended December 31, 2011.
Income from Operations and SG&A Expenses. Income from operations increased $68 million to $1,092 million for the year ended December 31, 2012, principally due to the increase in our gross profit partially offset by the increase in SG&A expenses. As a percentage of net sales, our SG&A expenses improved to 37.8% for the year ended December 31, 2012, compared to 38.3% in the prior year. SG&A expenses increased $11 million for the year ended December 31, 2012 compared with the prior period. The increase was the result of higher labor and benefit costs and an increase in marketing investments. These increases were partially offset by lower transportation costs, lower professional fees driven by the favorable comparison to the $18 million legal provision associated with the ABC litigation recorded during the prior year and the favorable impact of foreign currency on our SG&A expenses. The lower transportation costs were the result of the reclassification of $14 million for certain transportation allowances to our customers from SG&A expenses to net sales and lower distribution fees as a result of lower NCB volumes from our Packaged Beverages segment.
Interest Expense, Interest Income and Other Income, Net. Interest expense increased $11 million for the year ended December 31, 2012 compared with the year ago period, primarily due to higher interest rates associated with the senior notes that we issued during 2011. Other income, net was $9 million for the year ended December 31, 2012, which related primarily to indemnity income associated with the Tax Indemnity Agreement with Mondelēz.
Provision for Income Taxes. The effective tax rates for the year ended December 31, 2012 and 2011 were 35.7% and 34.6%, respectively. The prior year effective tax rate included certain state and federal income tax benefits, primarily the domestic manufacturing deduction, related to the PepsiCo and Coca-Cola licensing agreements executed in 2010. The impact of these benefits decreased the provision for income taxes and the effective tax rate for the year ended December 31, 2011 by $19 million and 2.1%, respectively.

33


Results of Operations by Segment
We report our business in three segments: Beverage Concentrates, Packaged Beverages and Latin America Beverages. The key financial measures management uses to assess the performance of our segments are net sales and SOP. The following tables set forth net sales and SOP for our segments for 2012 and 2011, as well as the other amounts necessary to reconcile our total segment results to our consolidated results presented in accordance with U.S. GAAP (in millions):
 
For the Year Ended
 
December 31,
 
2012
 
2011
Segment Results — Net sales
 
 
 
Beverage Concentrates
$
1,221

 
$
1,193

Packaged Beverages
4,358

 
4,292

Latin America Beverages
416

 
418

Net sales
$
5,995

 
$
5,903

 
 
 
 
 
 
 
 
 
For the Year Ended
 
December 31,
 
2012
 
2011
Segment Results — SOP
 
 
 
Beverage Concentrates
$
774

 
$
779

Packaged Beverages
539

 
519

Latin America Beverages
51

 
43

Total SOP
1,364

 
1,341

Unallocated corporate costs
261

 
306

Other operating expense, net
11

 
11

Income from operations
1,092

 
1,024

Interest expense, net
123

 
111

Other income, net
(9
)
 
(12
)
Income before provision for income taxes and equity in earnings of unconsolidated subsidiaries
$
978

 
$
925

BEVERAGE CONCENTRATES
The following table details our Beverage Concentrates segment's net sales and SOP for the years ended December 31, 2012 and 2011 (in millions):
 
For the Year Ended
 
 
 
December 31,
 
 
 
2012
 
2011
 
Change
Net sales
$
1,221

 
$
1,193

 
$
28

SOP
774

 
779

 
(5
)
Net Sales. Net sales increased $28 million for the year ended December 31, 2012 compared with the year ended December 31, 2011. The increase was primarily due to an increase in concentrate prices, lower discounts and favorable mix, which were partially offset by a 2% decline in concentrate case sales.
SOP. SOP decreased $5 million, or approximately 1%, for the year ended December 31, 2012, as compared with the year ago period. The decrease was primarily driven by $21 million of higher marketing investments and increased costs for our commodities, led by flavors. These decreases were partially offset by the benefit of higher net sales.

34


Volume (BCS). Volume (BCS) was flat for the year ended December 31, 2012, as compared with the year ago period. Our Core 4 brands decreased approximately 1% compared to the prior year as a result of high single-digit declines in Sunkist soda and low single-digit decreases in 7UP and A&W, partially offset by a mid single-digit increase in Canada Dry. Sun Drop had a high single-digit decline whereas Crush had a mid single-digit decline. Dr Pepper volume was flat due to increases in regular Dr Pepper and Dr Pepper TEN, which launched in the fourth quarter of 2011, offset by declines in Cherry and Diet.
PACKAGED BEVERAGES
The following table details our Packaged Beverages segment's net sales and SOP for the years ended December 31, 2012 and 2011 (in millions):
 
For the Year Ended
 
 
 
December 31,
 
 
 
2012
 
2011
 
Change
Net sales
$
4,358

 
$
4,292

 
$
66

SOP
539

 
519

 
20

Volume. Total sales volume decreased 2% for the year ended December 31, 2012, compared with the year ended December 31, 2011, driven by lower NCB volumes.
Within CSDs, volume was flat for the year ended December 31, 2012, compared with the year ended December 31, 2011. Volume for our Core 4 brands increased 2%, led by a high single-digit increase in Canada Dry, a mid single-digit increase in Sunkist soda, as a result of flavor expansion, and a low single-digit increase in A&W partially offset by a mid single-digit decrease in 7UP. Dr Pepper volumes decreased 1% for the year ended December 31, 2012, as decreased volume in base Dr Pepper was partially offset by growth of Dr Pepper TEN, which launched in the fourth quarter of 2011. Squirt increased 2%. Sun Drop experienced a double-digit decrease primarily due to cycling the national launch of the brand in the prior year. Our other brands, which include Welch's, decreased 2% for the year ended December 31, 2012.
Within NCBs, volume decreased 5%. Hawaiian Punch declined 17% as a result of price increases, while Mott's decreased 7% as a result of net pricing increases and lower promotional activity. These decreases were partially offset by a 12% increase in our water category, led by Vita Coco and Deja Blue, and a 2% increase in Snapple due to package and flavor innovation.
Net Sales. Net sales increased $66 million for the year ended December 31, 2012, compared with the year ended December 31, 2011. Net sales increased due to favorable mix and net pricing increases for CSDs, Mott's and Hawaiian Punch. These increases were partially offset by a decrease in our sales volumes.
SOP. SOP increased $20 million for the year ended December 31, 2012 compared with the year ended December 31, 2011. Significant factors included the benefit of higher net sales partially offset by higher labor and benefit costs. Other positive factors that impacted SOP included ongoing productivity improvements, lower distribution fees, which were primarily a result of lower NCB volumes, and the favorable comparison of the ABC litigation recorded in the prior year. These positive factors were partially offset by higher costs for our commodities, increased manufacturing costs and an increase in our LIFO provision. The higher costs for our commodities, which impacted the increase in our LIFO provision, were led by apples, flavors, apple juice concentrate and PET.

35


LATIN AMERICA BEVERAGES
The following table details our Latin America Beverages segment's net sales and SOP for the years ended December 31, 2012 and 2011 (in millions):
 
For the Year Ended
 
 
 
December 31,
 
 
 
2012
 
2011
 
Change
Net sales
$
416

 
$
418

 
$
(2
)
SOP
51

 
43

 
8

Volume. Sales volume increased 2% for the year ended December 31, 2012, as compared with the year ended December 31, 2011, as volume increased in virtually all of our brands except Aguafiel. The increase in volume was led by a 5% increase in Peñafiel as a result of package innovations, an 11% increase in Crush, a 14% increase in Clamato and a double-digit increase in Dr Pepper due to targeted marketing programs. These increases in sales volume were partially offset by a 9% decrease in Aguafiel as a result of lower promotional activity.
Net Sales. Net sales decreased $2 million for the year ended December 31, 2012, compared with the year ended December 31, 2011. Net sales decreased as a result of $21 million of unfavorable foreign currency translation and a $7 million reclassification for certain transportation allowances to our customers from SG&A expenses to net sales. These decreases were partially offset by increased sales volumes, favorable product mix and price increases.
SOP. SOP increased $8 million, or approximately 19%, for the year ended December 31, 2012 compared with the year ended December 31, 2011, primarily due to the impact of favorable product mix, price increases, increased sales volumes and ongoing productivity improvements. These increases were partially offset by approximately $9 million of unfavorable foreign currency effects, higher logistics costs, increased cost for our commodities, led by sweeteners and flavors, and higher marketing investments.
LIQUIDITY AND CAPITAL RESOURCES
Trends and Uncertainties Affecting Liquidity
Customer and consumer demand for our products may be impacted by various risk factors discussed in Item 1A, "Risk Factors", including recession or other economic downturn in the U.S., Canada, Mexico or the Caribbean, 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 trends and uncertainties may also impact liquidity:
continued capital expenditures to upgrade our existing plants and fleet of distribution trucks, make investments in IT systems and replace and expand our cold drink equipment;
continued payment of dividends;
seasonality of our operating cash flows could impact short-term liquidity;
our ability to issue unsecured commercial paper notes ("Commercial Paper") on a private placement basis up to a maximum aggregate amount outstanding at any time of $500 million;
our continued repurchases of our outstanding common stock pursuant to our repurchase programs; and
acquisitions of regional bottling companies, distributors and distribution rights to further extend our geographic coverage or access to new products.
Financing Arrangements
The following descriptions represent our available financing arrangements as of December 31, 2013. As of December 31, 2013, we were in compliance with all covenant requirements for our senior unsecured notes, unsecured credit agreement and commercial paper program.

36


Commercial Paper Program
On December 10, 2010, we entered into a commercial paper program under which we may issue Commercial Paper on a private placement basis up to a maximum aggregate amount outstanding at any time of $500 million. The maturities of the Commercial Paper will vary, but may not exceed 364 days from the date of issuance. We issue Commercial Paper for general corporate purposes as Commercial Paper is now a more significant part of our overall cash management strategy. The program is supported by the Revolver (as defined below). Outstanding Commercial Paper reduces the amount of borrowing capacity available under the Revolver and outstanding amounts under the Revolver reduce the Commercial Paper availability. As of December 31, 2013, we had outstanding Commercial Paper of $65 million with maturities of 90 days or less. We had no outstanding Commercial Paper as of December 31, 2012.
Unsecured Credit Agreement 
On September 25, 2012, we entered into a five-year unsecured credit agreement (the "Credit Agreement"), which provides for a $500 million revolving line of credit (the "Revolver"). Borrowings under the Revolver bear interest at a floating rate per annum based upon the alternate base rate ("ABR") or the Eurodollar rate, in each case plus an applicable margin which varies based upon our debt ratings. Rates range from 0.000% to 0.300% for ABR loans and from 0.795% to 1.300% for Eurodollar loans. The ABR is defined as the greater of (a) JPMorgan Chase Bank's prime rate, (b) the federal funds effective rate plus 0.500% and (c) the adjusted LIBOR for a one month interest period. The adjusted LIBOR is the London interbank offered rate for dollars adjusted for a statutory reserve rate set by the Board of Governors of the U.S. Federal Reserve System.
Additionally, the Revolver is available for the issuance of letters of credit and swingline advances not to exceed $75 million and $50 million, respectively. Swingline advances will accrue interest at a rate equal to the ABR plus the applicable margin. Letters of credit and swingline advances will reduce, on a dollar for dollar basis, the amount available under the Revolver.
The following table provides amounts utilized and available under the Revolver and each sublimit arrangement type as of December 31, 2013 (in millions):
 
Amount Utilized
 
Balances Available
Revolver
$

 
$
433

Letters of credit
2

 
73

Swingline advances

 
50

The Credit Agreement further provides that we may request at any time, subject to the satisfaction of certain conditions, that the aggregate commitments under the facility be increased by a total amount not to exceed $250 million.
The Credit Agreement's representations, warranties, covenants and events of default are generally customary for investment grade credit and include a covenant that requires us to maintain a ratio of consolidated total debt (as defined in the Credit Agreement) to annualized consolidated EBITDA (as defined in the Credit Agreement) of no more than 3.00 to 1.00, tested quarterly. Upon the occurrence of an event of default, among other things, amounts outstanding under the Credit Agreement may be accelerated and the commitments may be terminated. Our obligations under the Credit Agreement are guaranteed by certain of our direct and indirect domestic subsidiaries on the terms set forth in the Credit Agreement. The Credit Agreement has a maturity date of September 25, 2017; however, with the consent of lenders holding more than 50% of the total commitments under the Credit Agreement and subject to the satisfaction of certain conditions, we may extend the maturity date for up to two additional one-year terms.
An unused commitment fee is payable quarterly to the lenders on the unused portion of the commitments available under the Revolver equal to 0.08% to 0.20% per annum, depending upon our debt ratings.
Shelf Registration Statement
On February 7, 2013, our Board authorized us to issue up to $1,500 million of securities from time to time. Subsequently, we filed a "well-known seasoned issuer" shelf registration statement with the Securities and Exchange Commission, effective May 23, 2013, which registers an indeterminable amount of securities for future sales. As of December 31, 2013, we had not issued any securities under this shelf registration statement.

37


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, $90 million is available for the issuance of letters of credit, $63 million of which was utilized as of December 31, 2013 and $27 million of which remains available for use.
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 years ended December 31, 2013, 2012 and 2011 (in millions):
 
For the Year Ended
 
December 31,
 
2013
 
2012
 
2011
Net cash provided by operating activities
$
866

 
$
482

 
$
783

Net cash used in investing activities
(195
)
 
(217
)
 
(240
)
Net cash used in financing activities
(880
)
 
(603
)
 
(152
)
NET CASH PROVIDED BY OPERATING ACTIVITIES
Net cash provided by operating activities increased $384 million for the year ended December 31, 2013, as compared to the year ended December 31, 2012, primarily due to the favorable comparison of the 2012 tax payments of $531 million resulting from the licensing agreements with PepsiCo and Coca-Cola, partially offset by unfavorable working capital comparisons to the prior year.
Net cash provided by operating activities decreased $301 million for the year ended December 31, 2012, as compared to the year ended December 31, 2011, primarily due to the tax payments of $531 million resulting from the licensing agreements with PepsiCo and Coca-Cola. The impact of the tax payments was partially offset by favorability in our working capital primarily due to improved trade accounts receivable of $91 million, which was driven by lower sales in the fourth quarter of 2012 and higher collections.
NET CASH USED IN INVESTING ACTIVITIES
Cash used in investing activities for the year ended December 31, 2013, consisted primarily of purchases of property, plant and equipment of $179 million and cash paid to liquidate the liabilities assumed and expenses incurred in connection with the acquisition of DP/7UP West of $10 million. Purchases of property, plant and equipment have decreased over the prior period in line with our focus on reducing our purchases, net of proceeds from disposal of property, plant and equipment, in an amount slightly below 3.00% of our current year net sales.
Net cash used in investing activities decreased $23 million for the year ended December 31, 2012, as compared to the year ended December 31, 2011, driven primarily by lower purchases of property, plant and equipment. Purchases of property, plant and equipment decreased for the year ended December 31, 2012 over the year ended December 31, 2011 in line with our focus on reducing our purchases, net of proceeds from disposal of property, plant and equipment. For the year ended December 31, 2012, the amount of these purchases was equal to approximately 3.50% of net sales, while it was approximately 4.00% of net sales for the year ended December 31, 2011.
NET CASH USED IN FINANCING ACTIVITIES
2013
Net cash used in financing activities for the year ended December 31, 2013 primarily consisted of stock repurchases of $400 million and dividend payments of $302 million.
On May 1, 2013, we repaid $250 million of our 6.12% senior notes due May 1, 2013 at maturity.

38


2012
Net cash used in financing activities for the year ended December 31, 2012 primarily consisted of stock repurchases of $400 million and dividend payments of $284 million.
On November 20, 2012, we completed the issuance of $500 million aggregate principal amount of senior unsecured notes consisting of $250 million aggregate principal amount of our 2.00% senior notes due January 15, 2020 and $250 million aggregate principal amount of our 2.70% senior notes due November 15, 2022.
On December 21, 2012, we repaid $450 million of our 2.35% senior notes due December 21, 2012 at maturity.
2011
Net cash used in financing activities for the year ended December 31, 2011 primarily consisted of stock repurchases of $522 million and dividend payments of $251 million.
On January 11, 2011, we completed the issuance of $500 million aggregate principal amount of 2.90% senior notes due January 15, 2016.
On November 15, 2011, we completed the issuance of $500 million aggregate principal amount of senior unsecured notes consisting of $250 million aggregate principal amount of 2.60% senior notes due January 15, 2019 and $250 million aggregate principal amount of 3.20% senior notes due November 15, 2021.
On December 21, 2011, we repaid $400 million of our 1.70% senior notes due December 21, 2011 at maturity.
Debt Ratings
As of December 31, 2013, our debt ratings were Baa1 with a stable outlook from Moody's and BBB+ with a stable outlook from S&P. On November 13, 2013, S&P raised our rating from BBB with a positive outlook to BBB+ with a stable outlook. Our commercial paper ratings were P-2/A-2 from Moody's and S&P, respectively.
These debt and commercial paper ratings impact the interest we pay on our financing arrangements. A downgrade of one or both of our debt and commercial paper ratings could increase our interest expense and decrease the cash available to fund anticipated obligations.
Cash Management
We fund our liquidity needs from cash flow from operations, cash on hand or amounts available under our financing arrangements, as Commercial Paper is now a more significant part of our overall cash management strategy.
Capital Expenditures
Capital expenditures were $179 million, $217 million and $238 million for the years ended December 31, 2013, 2012 and 2011, respectively. Capital expenditures have reduced over the last three years as a result of a stronger focus on the return on our discretionary capital expenditures, the result of our RCI initiatives and reduced infrastructure investments required after our separation from Cadbury. Capital expenditures for the years ended December 31, 2013 and 2012 primarily related to machinery and equipment, IT investments, expansion and replacement of existing cold drink equipment, plant improvements and our distribution fleet. Capital expenditures for the year ended December 31, 2011 primarily consisted of expansion of our capabilities in existing facilities, cold drink equipment and IT investments for new systems.
In 2014, we expect to incur annual capital expenditures, net of proceeds from disposals, in an amount approximately 3.00% of our net sales, which we expect to fund through cash provided by operating activities.

39


Cash and Cash Equivalents
As a result of the above items, cash and cash equivalents decreased $213 million since December 31, 2012 to $153 million as of December 31, 2013 primarily driven by our decision to hold a minimum amount of cash in the U.S. and use Commercial Paper as needed for our operating needs.
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. annually except when required to fund working capital requirements in those jurisdictions. Foreign cash balances were $65 million and $109 million as of December 31, 2013 and 2012, respectively. We accrue tax costs for repatriation, as applicable, as cash is generated in those foreign jurisdictions.
Acquisitions
On February 25, 2013, we acquired certain assets of DP/7UP West to strengthen our route to market in the U.S. and support efforts to build and enhance our leading brands. The fair value of the consideration paid for this acquisition was $23 million consisting of the issuance by us of 313,105 shares of common stock to DP/7UP West and the assumption of certain liabilities of DP/7UP West to consummate the transaction.
During the first quarter of 2013, we also reacquired the distribution rights for Snapple and several other NCB brands in parts of Asia-Pacific from Mondelēz.
We may continue to make future acquisitions, such as 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.
Dividends
Our Board declared aggregate dividends aggregating of $1.52, $1.36 and $1.21 per share on outstanding common stock during the years ended December 31, 2013, 2012 and 2011, respectively.
Our fourth quarter 2013 dividend was paid on January 3, 2014, to shareholders of record on December 16, 2013.
Common Stock Repurchases
As previously disclosed, our Board has authorized us to purchase an aggregate amount of up to $3,000 million of our outstanding common stock. We repurchased and retired 8.7 million shares of common stock valued at approximately $400 million, 9.5 million shares of common stock valued at approximately $400 million and 13.7 million shares of common stock valued at approximately $522 million for the years ended December 31, 2013, 2012 and 2011, respectively. Refer to Part II, Item 5 "Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities" of this Annual Report on Form 10-K for additional information regarding these repurchases.

40


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. Refer to Note 9 of the Notes to our Audited Consolidated Financial Statements for additional information regarding the senior unsecured notes payments and Commercial Paper described in this table.
The following table summarizes our contractual obligations and contingencies as of December 31, 2013 (in millions):
 
 
 
Payments Due in Year
 
Total
 
2014
 
2015
 
2016
 
2017
 
2018
 
After 2018
Senior unsecured notes(1)
$
2,474

 
$

 
$

 
$
500

 
$

 
$
724

 
$
1,250

Commercial Paper
65

 
65

 

 

 

 

 

Capital leases(2)
87

 
6

 
6

 
6

 
6

 
6

 
57

Operating leases(3)
265

 
55

 
44

 
38

 
30

 
22

 
76

Purchase obligations(4)
634

 
513

 
69

 
30

 
16

 
4

 
2

Interest payments(5)
935

 
94

 
96

 
96

 
97

 
78

 
474

Payable to Mondelēz
54

 
7

 
7

 
7

 
7

 
7

 
19

Total
$
4,514

 
$
740

 
$
222

 
$
677

 
$
156

 
$
841

 
$
1,878

____________________________
(1)
Amounts represent payment for the senior unsecured notes issued by us. Please refer to Note 9 of the Notes to our Audited Consolidated Financial Statements for further information.
(2)
Amounts represent our contractual payment obligations for our lease arrangements classified as capital leases. These amounts exclude renewal options not yet executed but were included in the lease term to determine the capital lease obligation as the lease imposes a penalty on us in such amount that the renewal appeared reasonably assured at lease inception.
(3)
Amounts represent minimum rental commitments under non-cancelable operating leases.
(4)
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.
(5)
Amounts represent our estimated interest payments based on specified interest rates for fixed rate debt and the impact of interest rate swaps which convert fixed interest rates to variable interest rates.
Amounts excluded from our table
As of December 31, 2013, we had $14 million of non-current unrecognized tax benefits, related interest and penalties classified as a long-term liability. The table above does not reflect any payments related to these amounts as it is not possible to make a reasonable estimate of the amount or timing of the payment. Refer to Note 12 of the Notes to our Audited Consolidated Financial Statements.
The total accrued benefit liability representing the underfunded position for pension and other postretirement benefit plans recognized as of December 31, 2013 was approximately $27 million. This amount is impacted by, among other items, funding levels, plan amendments, changes in plan assumptions and the investment return on plan assets. We did not include estimated payments related to our total accrued benefit liability in the table above.
The Pension Protection Act of 2006 was enacted in August 2006 and established, among other things, new standards for funding of U.S. defined benefit pension plans. We generally expect to fund all future contributions with cash flows from operating activities. Our international pension plans are generally funded in accordance with local laws and income tax regulations. We did not include our estimated contributions to our various single employer plans in the table above.

41


Additionally, we recorded an estimated $56 million withdrawal liability for one of the four multi-employer pension plans we currently participate in as we intend to withdraw from this plan. As we can not estimate the timing or actual amount of payments until the plan formally assesses us with the withdrawal liability, those payments have been excluded from the table above.
Refer to Note 14 of the Notes to our Audited Consolidated Financial Statements for further information regarding our single employer and multi-employer plans discussed above.
We have a deferred compensation plan where the assets are maintained in a rabbi trust and the corresponding liability related to the plan is recorded in other non-current liabilities. We did not include estimated payments related to the deferred compensation liability as the timing and payment of these amounts are determined by the participants and outside our control. Refer to Note 2 of the Notes to our Audited Consolidated Financial Statements.
In general, we are covered under conventional insurance programs with high deductibles or are self-insured for large portions of many different types of claims. Our insurance liability for our losses related to these programs are estimated through actuarial procedures of the insurance industry and by using industry assumptions, adjusted for our specific expectations based on our claim history. As of December 31, 2013, our insurance liability totaled approximately $136 million. Refer to Notes 8 and 11 of the Notes to our Audited Consolidated Financial Statements. We did not include estimated payments related to our insurance liability in the table above.
OFF-BALANCE SHEET ARRANGEMENTS
We currently participate in four multi-employer pension plans. In the event that we withdraw from participation in one of these plans, the plan will ultimately assess us a withdrawal liability for exiting the plan, and U.S. GAAP would require us to record the withdrawal charge as an expense in our consolidated statements of income and as a liability on our consolidated balance sheets. During the second quarter of 2013, the Company recognized a $1 million withdrawal liability for one of the collective bargaining units under a multi-employer plan based on the trustees' assessment. During the fourth quarter of 2013, the Company recognized a $56 million withdrawal liability related to Local 710 as we intend to withdraw during our upcoming collective bargaining session. As a result of these actions, the Company recognized additional multi-employer pension plan expense of $57 million for the year ended December 31, 2013. There were no additional multi-employer plan expenses recognized during the year ended December 31, 2012. We recognized additional multi-employer plan expense of $1 million during the year ended December 31, 2011.
There are no other off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our results of operations, financial condition, liquidity, capital expenditures or capital resources other than letters of credit outstanding. Refer to Note 9 of the Notes to our Audited Consolidated Financial Statements for additional information regarding outstanding letters of credit.
OTHER MATTERS
Agreements with PepsiCo and Coca-Cola
On February 26, 2010, we completed the licensing of certain brands to PepsiCo following PepsiCo's acquisitions of Pepsi Bottling Group and PepsiAmericas, Inc.. Under the agreements, we received a one-time nonrefundable cash payment of $900 million. The agreements have an initial period of 20 years with automatic 20-year renewal periods, and require PepsiCo to meet certain performance conditions.
On October 4, 2010, we completed the licensing of certain brands to Coca-Cola following Coca-Cola's acquisition of Coca-Cola Enterprises' North American Bottling Business and executed separate agreements pursuant to which Coca-Cola began offering Dr Pepper and Diet Dr Pepper in local fountain accounts and its Freestyle fountain program. Under the agreements, we received a one-time nonrefundable cash payment of $715 million. The agreements have an initial period of 20 years with automatic 20-year renewal periods, and require Coca-Cola to meet certain performance conditions.
Under a separate agreement, Coca-Cola has agreed to include Dr Pepper and Diet Dr Pepper brands in its Freestyle fountain program. The Freestyle fountain program agreement has a period of 20 years.
These payments were recorded as deferred revenue and recognized as net sales ratably over the estimated 25-year life of the customer relationships.

42


CRITICAL ACCOUNTING ESTIMATES
The process of preparing our consolidated financial statements in conformity with U.S. GAAP requires the use of estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses. Critical accounting estimates are both fundamental to the portrayal of a company’s financial condition and results and require difficult, subjective or complex estimates and assessments. These estimates and judgments are based on historical experience, future expectations and other factors and assumptions we believe to be reasonable under the circumstances. The most significant estimates and judgments are reviewed on an ongoing basis and revised when necessary. We have identified the items described below as our critical accounting estimates. We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use in our critical accounting estimates. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to gains or losses that could be material to our consolidated financial statements. See Note 2 of the Notes to our Audited Consolidated Financial Statements for a discussion of these and other accounting policies.
Description
 
Judgments and Uncertainties
 
Effect if Actual Results Differ from Assumptions
Goodwill and Other Indefinite Lived Intangible Assets
 
 
For goodwill and other indefinite lived intangible assets, we conduct tests for impairment annually, as of October 1, or more frequently if events or circumstances indicate the carrying amount may not be recoverable. We use present value and other valuation techniques to make this assessment. If the carrying amount of goodwill or an intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. For purposes of impairment testing we assign goodwill to the reporting unit that benefits from the synergies arising from each business combination and also assign indefinite lived intangible assets to our reporting units. We define reporting units as Beverage Concentrates, Latin America Beverages, and Packaged Beverages' two reporting units, DSD and WD.

The impairment test for indefinite lived intangible assets encompasses calculating a fair value of an indefinite lived intangible asset and comparing the fair value to its carrying value. If the carrying value exceeds the estimated fair value, impairment is recorded. The impairment tests for goodwill include comparing a fair value of the respective reporting unit with its carrying value, including goodwill and considering any indefinite lived intangible asset impairment charges ("Step 1"). If the carrying value exceeds the estimated fair value, impairment is indicated and a second step ("Step 2") analysis must be performed.
 
For our detailed impairment analysis, we used an income based approach to determine the fair value of our assets, as well as an overall consideration of market capitalization and our enterprise value. These types of analyses contain uncertainties because they require management to make assumptions and to apply judgment to estimate industry and economic factors and the profitability of future business strategies. These assumptions could be negatively impacted by various risks discussed in "Risk Factors" in this Annual Report on Form 10-K.

Critical assumptions include revenue growth and profit performance, as well as an appropriate discount rate. Discount rates are based on a weighted average cost of equity and cost of debt, adjusted with various risk premiums. For 2013, such discount rates ranged from 8.00% to 13.25%.
 
We have not made any material changes in the accounting methodology we use to assess impairment loss on goodwill and other indefinite lived intangible assets during the past three years.

The carrying values of goodwill and indefinite lived intangible assets as of December 31, 2013, were $2,988 million and $2,694 million, respectively.

We have not identified any impairments in goodwill or other indefinite lived intangible assets during the past three years. The effect of a 1% increase or decrease in the discount rate used to determine the fair value of the reporting unit or the indefinite lived intangible asset does not change our conclusion regarding the identification of any impairments in goodwill or other indefinite lived intangible assets.
 
 
 
 
 
Customer Incentives and Marketing Programs
 
 
 
 
Accruals for customer discounts, incentives and marketing programs are established for the expected payout based on contractual terms, volume-based metrics and/or historical trends.
 
Our customer incentives and marketing accrual methodology contains uncertainties because it requires management to make assumptions and to apply judgment to estimate our customer participation and volume performance levels which impact the expense recognition. Our estimate of the amount and timing of customer participation and volume performance levels is based primarily on a combination of known or historical transaction experience and forecasted volumes. Differences between estimated expenses and actual incentive costs are normally insignificant and are recognized to earnings in the period differences are determined.

Further judgment is required to ensure the classification of the spend is correctly recorded as either a reduction from gross sales or advertising and marketing expense.
 
We have not made any material changes in the accounting methodology we used to measure our customer incentives and marketing programs.

A 10% change in the accrual for our customer marketing programs and incentives as of December 31, 2013, would have affected net income by $14 million for the year ended December 31, 2013.
 
 
 
 
 
 
 
 
 
 

43


Description
 
Judgments and Uncertainties
 
Effect if Actual Results Differ from Assumptions
Revenue Recognition
 
 
 
 
We recognize revenue, net of the costs of our customer incentives, at the time risk of loss has been transferred to our customer.

See the discussion above under Customer Incentives and Marketing Programs for further information.
 
Our revenue recognition accounting methodology contains uncertainties because it requires management to make assumptions and to apply judgment to estimate the amount of shipments where risk of loss has not yet transferred. Our estimates are based primarily on historical transactional experience, which is reviewed annually.


 
We have not made any material changes in the accounting methodology we used to measure our estimate for shipments where risk of loss has not yet transferred.

A 10% change in the estimate for shipment where the risk of loss has not yet transferred as of December 31, 2013, would have affected net income by less than $1 million for the year ended December 31, 2013.
 
 
 
 
 
Pension and Postretirement Benefits
 
 
We have several pension and postretirement plans covering employees who satisfy age and length of service requirements. Depending on the plan, pension and postretirement benefits are based on a combination of factors, which may include salary, age and years of service.

Our largest U.S. defined benefit pension plan, which is a cash balance plan, was suspended and the accrued benefit was frozen effective December 31, 2008. Participants in this plan no longer earn additional benefits for future services or salary increases.

Employee benefit plan obligations and expenses included in our Consolidated Financial Statements are determined from actuarial analyses based on plan assumptions, employee demographic data, years of service, compensation, benefits and claims paid and employer contributions.
 
The calculation of pension and postretirement plan obligations and related expenses is dependent on several assumptions used to estimate the present value of the benefits earned while the employee is eligible to participate in the plans.

The key assumptions we use in the actuarial methods to determine the plan obligations and related expenses include: (1) the discount rate used to calculate the present value of the plan liabilities; (2) employee turnover, retirement age and mortality; and (3) the expected return on plan assets. Our assumptions reflect our historical experience and our best judgment regarding future performance.

Refer to Note 14 of the Notes to our Audited Consolidated Financial Statements for further information about the key assumptions.
 
The effect of a 1% increase or decrease in the weighted-average discount rate used to determine the pension benefit obligations for U.S. plans would change the benefit obligation as of December 31, 2013, by approximately $24 million and $28 million, respectively. 
The effect of a 1% increase or decrease in the weighted-average discount rate used to determine the net periodic pension costs would change the costs for the year ended December 31, 2013, by approximately $1 million. 
The effect of a 1% increase or decrease in the expected return on plan assets used to determine the net periodic pension costs would change the costs for the year ended December 31, 2013 by approximately $2 million.
 
 
 
 
 
Multi-employer Pension Plan Withdrawal Liability
 
 
We contribute to a number of multi-employer defined benefit plans under the terms of collective bargaining agreements that cover its union-represented employees. We record liabilities to exit a participating plan when an exit becomes both probable and estimable. The estimated withdrawal liability is determined from actuarial analyses based on historical and anticipated employer contributions.
 
The calculation of the multi-employer pension plan withdrawal liability and related expense is dependent on several assumptions used to estimate the present value of the estimated withdrawal liability.

The key assumptions we use in the actuarial methods to determine the estimated withdrawal liability and related expenses include: (1) the amount of the anticipated contributions, which is based upon the timing of the withdrawal liability assessment provided by the trustee; (2) the discount rate used to calculate the present value of the estimated withdrawal liability; and (3) the expected return on plan assets. Our assumptions reflect our best judgment regarding the outcome of the assessment.


 
The effect of a 10% increase or decrease in the anticipated contributions used by the trustee to assess the withdrawal liability would change the withdrawal liability as of December 31, 2013, by approximately $6 million.

The effect of a 1% increase or decrease in the discount rate used to determine the withdrawal liability would change the withdrawal liability as of December 31, 2013, by approximately $7 million and $9 million, respectively.
 
 
 
 
 
 
 
 
 
 

44


Description
 
Judgments and Uncertainties
 
Effect if Actual Results Differ from Assumptions
Risk Management Programs
 
 
We retain selected levels of property, casualty, workers' compensation, health and other business risks. Many of these risks are covered under conventional insurance programs with high deductibles or self-insured retentions.
 
We believe the use of actuarial methods to estimate our future losses provides a consistent and effective way to measure our self-insured liabilities. However, the estimation of our liability is judgmental and uncertain given the nature of claims involved and length of time until their ultimate cost is known.

Accrued liabilities related to the retained casualty and health risks are calculated based on loss experience and development factors, which contemplate a number of variables including claim history and expected trends. These loss development factors are established in consultation with actuaries.
 
We do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions we use to calculate our self-insured liabilities. The final settlement amount of claims can differ materially from our estimate as a result of changes in factors such as the frequency and severity of accidents, medical cost inflation, legislative actions, uncertainty around jury verdicts and awards and other factors outside of our control.

A 10% change in our accrued liabilities related to the retained risks as of December 31, 2013, would have affected net income by approximately $8 million for the year ended December 31, 2013.
 
 
 
 
 
Income Taxes
 
 
We establish income tax liabilities to remove some or all of the income tax benefit of any of our income tax positions based upon one of the following: (1) the tax position is not “more likely than not” to be sustained, (2) the tax position is “more likely than not” to be sustained, but for a lesser amount, or (3) the tax position is “more likely than not” to be sustained , but not in the financial period in which the tax position was originally taken.

We assess the likelihood of realizing our deferred tax assets. Valuation allowances reduce deferred tax assets to the amount more likely than not to be realized.
 
Our liability for uncertain tax positions contains uncertainties because management is required to make assumptions and to apply judgment to estimate the exposures associated with our various tax positions.

We base our judgment of the recoverability of our deferred tax asset primarily on historical earnings, our estimate of current and expected future earnings and prudent and feasible tax planning strategies.
 
Our income tax returns, like those of most companies, are periodically audited by domestic and foreign tax authorities. These audits include questions regarding our tax positions, including the timing and amount of deductions and the allocation of income among various tax jurisdictions. As these audits progress, events may occur that cause us to change our liability for uncertain tax positions.

To the extent we prevail in matters for which a liability for uncertain tax positions has been established, or are required to pay amounts in excess of our established liability, our effective tax rate in a given financial statement period could be materially affected. An unfavorable tax settlement generally would require use of our cash and may result in an increase in our effective tax rate in the period of resolution. A favorable tax settlement may be recognized as a reduction in our effective tax rate in the period of resolution.

If results differ from our assumptions, a valuation allowance against deferred tax assets may be increased or decreased which would impact our effective tax rate.

EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
Refer to Note 2 of the Notes to our Audited Consolidated Financial Statements in Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K for a discussion of recently issued accounting standards and recently adopted provisions of U.S. GAAP.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to market risks arising from changes in market rates and prices, including movements in foreign currency exchange rates, interest rates and commodity prices. From time to time, we may enter into derivatives or other financial instruments to hedge or mitigate commercial risks. We do not enter into derivative instruments for speculation, investing or trading.
Foreign Exchange Risk
The majority of our net sales, expenses and capital purchases are transacted in U.S. dollars. However, we have some exposure with respect to foreign exchange rate fluctuations. Our primary exposure to foreign exchange rates is the Canadian dollar and Mexican peso against the U.S. dollar. Exchange rate gains or losses related to foreign currency transactions are recognized as transaction gains or losses in our income statement as incurred. As of December 31, 2013, the impact to our income from operations of a 10% change (up or down) in exchange rates is estimated to be an increase or decrease of approximately $19 million on an annual basis.
We use derivative instruments such as foreign exchange forward contracts to manage a portion of our exposure to changes in foreign exchange rates. As of December 31, 2013, we had derivative contracts outstanding with a notional value of $45 million maturing at various dates through December 15, 2014.

45


Interest Rate Risk
We centrally manage our debt portfolio through the use of interest rate swaps and monitor our mix of fixed-rate and variable rate debt. At December 31, 2013, the carrying value of our fixed-rate debt, excluding capital leases, was $2,453 million, $720 million of which is designated as fair value hedges and exposed to variability in interest rates.
The following table is an estimate of the impact to the fair value hedges that could result from hypothetical interest rate changes during the term of the financial instruments, based on debt levels as of December 31, 2013:
Sensitivity Analysis
 
 
 
 
Change in Fair Value
Hypothetical Change in Interest Rates
 
Annual Impact to Interest Expense
 
Other Current and Non-current Assets
 
Other Non-current Liabilities
 
Total Debt
1-percent decrease(1)
 
$

 
$24 million increase
 
$29 million decrease
 
$53 million increase
1-percent increase
 
$7 million increase

 
$17 million decrease
 
$45 million increase
 
$62 million decrease
____________________________
(1)
We pay an average floating rate, which fluctuates periodically, based on LIBOR and a credit spread, as a result of designated fair value hedges on certain debt instruments. See Note 9 of the Notes to our Audited Consolidated Financial Statements for further information. Our weighted average LIBOR rate as of December 31, 2013 was 0.26%. As LIBOR has not historically fallen below 0.17%, our estimate of the annual impact to interest expense reflects this assumption if our hypothetical change in the interest rate fell below the historical threshold.
Commodity Risks
We are subject to market risks with respect to commodities because our ability to recover increased costs through higher pricing may be limited by the competitive environment in which we operate. Our principal commodities risks relate to our purchases of PET, diesel fuel, corn (for high fructose corn syrup), aluminum, sucrose, apple juice concentrate, apples and natural gas (for use in processing and packaging).
We utilize commodities forward and future contracts and supplier pricing agreements to hedge the risk of adverse movements in commodity prices for limited time periods for certain commodities. The fair market value of these contracts as of December 31, 2013 was a net liability of $12 million.
As of December 31, 2013, the impact of a 10% change (up or down) in market prices for these commodities where the risk of adverse movements has not been hedged is estimated to be an increase or decrease of approximately $30 million to our income from operations for the year ending December 31, 2014.


46


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


47


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Dr Pepper Snapple Group, Inc.

We have audited the accompanying consolidated balance sheets of Dr Pepper Snapple Group, Inc. and subsidiaries (the "Company") as of December 31, 2013 and 2012, and the related consolidated statements of income, comprehensive income, changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2013. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Dr Pepper Snapple Group, Inc. and subsidiaries at December 31, 2013 and 2012, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2013, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of December 31, 2013, based on the criteria established in Internal Control-Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 19, 2014 expressed an unqualified opinion on the Company's internal control over financial reporting.

/s/ Deloitte & Touche LLP
Dallas, Texas
February 19, 2014



48


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Dr Pepper Snapple Group, Inc.

We have audited the internal control over financial reporting of Dr Pepper Snapple Group, Inc. and subsidiaries (the "Company") as of December 31, 2013, based on criteria established in Internal Control-Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Annual Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or tim