10-K 1 dps-10kx123116.htm 2016 FORM 10-K Document
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
 Form 10-K
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2016
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from          to          
 Commission file number 001-33829
dpsgigroupinca12.jpg
(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 x    No o

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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 x    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 x    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 x
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 x

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, 2016, the last business day of the registrant's most recently completed second fiscal quarter, was $17,858,301,618 (based on the closing sales price of the registrant's common stock on that date as reported on the New York Stock Exchange).
 
As of February 10, 2017, there were 183,094,247 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 18, 2017 are incorporated by reference in Part III.
 



DR PEPPER SNAPPLE GROUP, INC.
FORM 10-K
For the Year Ended December 31, 2016

 
 
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
 
 
 
 
 
 


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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements including, in particular, statements about future events, and 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 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;
maintaining our relationships with our allied brand owners;
changes in the cost of commodities used in our business;
the impact of new or proposed beverage taxes or regulations on our business;
our ability to successfully integrate and manage our acquired businesses or brands;
future impairment of our goodwill and other intangible assets;
the need to service our debt;
fluctuations in foreign currency exchange rates;
recession, financial and credit market disruptions and other economic conditions;
disruptions to our information systems and third-party service providers;
increases in the cost of employee benefits;
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; 
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;
our ability to retain or recruit qualified personnel; 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."), Mexico and Canada with a diverse portfolio of flavored (non-cola) carbonated soft drinks ("CSDs") and non-carbonated beverages ("NCBs"), including ready-to-drink teas, juices, juice drinks, water and mixers. 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:
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#1 flavored CSD company(1) in the U.S.
Approximately 83% of our bottler case sales ("BCS") volume from brands that are either #1 or #2 in their category(1)
#3 North American liquid refreshment beverage ("LRB") business(1)
$6.4 billion of net sales in 2016 from the U.S. (90%), Mexico and the Caribbean (7%) and Canada (3%)
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(1) Based on retail sales as reported by Information Resources, Inc. ("IRi")
History of Our Business
We have built our business over the last three decades through a series of strategic acquisitions. In the 1980s through the mid-1990s, 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. 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") 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.
Bai Brands LLC Merger
On November 21, 2016, we entered into an Agreement and Plan of Merger (the "Merger Agreement") with Bai Brands LLC ("Bai Brands"), pursuant to which we agreed to acquire Bai Brands for a cash purchase price of $1.7 billion, subject to certain adjustments in the Merger Agreement (the "Bai Brands Merger"). On January 31, 2017, we completed the Bai Brands Merger.
 
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Bai Brands is an innovative beverage company located in Hamilton, New Jersey. The Bai, Bai Cocofusion and Bai Bubbles lines offer fresh fruit flavor and antioxidants. Bai Brands also produces Bai Antiwater, Bai Supertea and Bai Black, which were launched in 2016. Bai Antiwater is an antioxidant-infused, super-purified bottled water. Bai Supertea is an antioxidant-infused real brewed tea. Bai Black is a line of classic CSD flavors. All of these product lines contain no artificial sweeteners and are only 5 calories and 1 gram of sugar per serving. Bai Brands was founded by 20-year beverage industry veteran Ben Weiss in 2009 and has grown rapidly with its products distributed by us prior to the Bai Brands Merger. Bai Brands was named one of Inc.’s 500 fastest-growing private companies in 2014, as well as one of America’s 20 Most Promising Companies by Forbes, Inc. in 2015.

 
 
 



1


PRODUCTS AND DISTRIBUTION
We are a leading integrated brand owner, manufacturer and distributor of non-alcoholic beverages in the U.S., Mexico and the Caribbean and Canada. We also sell certain of our products to distributors in Europe and Asia. We recognized net sales from the shipment of 1.6 billion equivalent 288 fluid ounce cases in 2016. The following charts provide various details regarding sources of our total 288 fluid ounce cases in 2016:
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Our success is fueled by more than 50 brands that are synonymous with refreshment, fun and flavor. We have seven of the top 10 non-cola soft drinks, and nine of our 10 leading brands are #1 or #2 in their flavor categories based on IRi sales volume.
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The highlights about our significant brands as of December 31, 2016 are as follows:
CSDs
 
 
 
 
 
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 #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

Our Core 4 brands
 
 
 
 
     canadadry2015a05.jpg
#1 ginger ale in the U.S. and Canada, which includes regular, diet and Canada Dry TEN
Brand also includes club soda, tonic, sparkling water and other mixers
Created in Toronto, Canada in 1904 and introduced in the U.S. in 1919
 
 
        a7up2015a06.jpg
#2 lemon-lime CSD in the U.S.
Flavors include regular, diet, cherry and 7UP TEN
The original "Un-Cola," created in 1929
 
 
   awrootbeer2015a06.jpg
#1 root beer in the U.S.
Flavors include regular, diet, A&W TEN and cream soda
A classic all-American beverage first sold at a veteran's parade in 1919
 
 
     sunkist2015a05.jpg
#1 orange CSD in the U.S.
Flavors include orange, diet, grape, strawberry, Sunkist TEN and other fruits
Licensed to us as a CSD by the Sunkist Growers Association since 1986
 
 
Other CSD brands
 
 
 
 
       penafielitem1a01a01a11.jpg              
#1 carbonated mineral water brand in Mexico
Brand includes unflavored mineral water, Limeade, Orangeade, Grapefruitade, Strawberryade, Twist and Flavors
Mexico's oldest mineral water, created in 1948
 
 
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#1 grapefruit CSD in the U.S. and a leading grapefruit CSD in Mexico
Founded in 1938
 
 
 
 

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#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
 
 
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#2 ginger ale in the U.S. and Canada
Brand includes club soda, tonic, sparkling water and other mixers
First carbonated beverage in the world, invented in 1783
 
 
NCBs
 
 
 
 
 
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#2 Premium shelf-stable ready to drink tea in the U.S.
A full range of premium, flavored tea products including regular and diet offerings, as well as unflavored Straight Up Tea
Brand also includes premium juices and juice drinks
Founded in Brooklyn, New York in 1972
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#2 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
 
 
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#1 branded multi-serve apple juice and 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
  clamato2015a05.jpg
A leading spicy tomato juice brand in the U.S., Canada and Mexico.
Key ingredient in the popular Mexican drink, the Michelada, and Canada’s national drink cocktail, the Bloody Caesar
Brand includes a variety of flavors, Original, Picante, Lime, and Preparado (the Works)
Created in 1969
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All information regarding our brand market positions in the U.S. is from IRi and is based on sales volume in 2016.
The Sunkist soda logo is a registered trademark of Sunkist Growers, Inc., which is used by us under license.
All other logos in the table above are registered trademarks of DPS or its subsidiaries.

4


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, Crush, A&W, Sunkist soda, Schweppes and Squirt, 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 IRi, we had a 21.2% share of the U.S. CSD market in 2016 (measured by retail sales), which increased 0.4% compared to 2015. We also manufacture fountain syrup that we sell to the foodservice industry directly, through bottlers or through other third parties.
In the NCB market segment in the U.S., we participate primarily in the ready-to-drink tea, juice, juice drinks, water, including flavored water, and mixer categories. Our key NCB brands are Snapple, Hawaiian Punch, 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 CSDs, bottled water and vegetable juice categories. Our key brands in Mexico include Peñafiel, Squirt, Aguafiel, Clamato and Crush. 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. We have also begun to distribute certain products in other international jurisdictions through various third party bottlers and distributors.
In 2016, we manufactured and/or distributed approximately 52% 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. According to IRi retail sales, 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. and our Snapple brand is a leading ready-to-drink tea. Overall, in 2016, 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, brand extensions or limited time offers, such as real sugar IBC, Stewart's and Crush in premium glass bottles, Honey Green and Rooibos flavors added to our Straight UP Tea line, Squirt cucumber-lime flavor launched in Mexico and Snapple seasonal limited time offerings including 'Merica's Tea and "Teacision" red and blue fruit election-themed offerings in 2016.
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 in the U.S. also enables us to improve focus on our brands, especially certain brands such as 7UP, A&W, Sunkist soda, Squirt, Snapple and Hawaiian Punch, 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., Safeway, Inc., Target Corporation and Publix Super Markets, Inc., some of the largest food service customers, including McDonald's Corporation, Yum! Brands, Inc., Burger King Corp., Sonic Corp., The Wendy's Company, Chick-fil-A, Inc., Subway Restaurants, Whataburger Restaurants LLC, Arby's Group, Inc., and Jack in the Box, 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.

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Attractive positioning within a large and profitable market.  We hold the #1 position in the U.S. flavored CSD beverage markets by sales volume according to IRi. 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 growing categories such as teas, juices and flavored water. 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, 2016, we had 19 manufacturing facilities and 96 principal distribution centers and warehouse facilities in the U.S., as well as four manufacturing facilities and 15 principal distribution centers and warehouse facilities in Mexico. 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 fleet (owned and leased) of approximately 6,000 and 1,600 vehicles in the U.S. and Mexico, respectively, and third party logistics providers on a selected basis. As a result of our distribution capabilities, we believe brand owners view us as a partner with a strong route-to-market in order to grow their allied brands in our Packaged Beverages segment.
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 acquisitions, 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, we have been able to increase our dividends each year since 2010 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 our 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 continue to invest most heavily in our priority brands to drive profitable and sustainable growth by strengthening consumer awareness, innovating against our 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 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.
Execute with excellence.  We are focused on improving our product presence in high margin brands, products and channels, such as convenience stores, vending machines and small independent retail outlets, through increased selling activity. 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.
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 optimizing 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.
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.

6


Rapid Continuous Improvement.  In 2011, we adopted our Rapid Continuous Improvement ("RCI"), which uses Lean and Six Sigma methods to deliver customer value and improve productivity. We believe RCI is a means to achieve revenue and net income growth and increase the amount of cash returned to our stockholders.
OUR BUSINESS OPERATIONS
 As of December 31, 2016, our operating structure consists of three operating segments: Beverage Concentrates, Packaged Beverages and Latin America Beverages. Segment financial data for 2016, 2015 and 2014, 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 2016, our Beverage Concentrates segment had net sales of approximately $1,284 million. Key brands include Dr Pepper, Canada Dry, Crush, Schweppes, Sunkist soda, A&W, 7UP, Sun Drop, Squirt, RC Cola, Diet Rite, Vernors and the concentrate form of Hawaiian Punch.
 We are the industry leader in flavored CSDs with a 38.8% market share in the U.S. for 2016 (as measured by retail sales) according to IRi. We are also the third largest CSD brand owner as measured by 2016 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, 57% 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 25% and 22%, respectively, of the segment's net sales during 2016.
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 2016, our Packaged Beverages segment had net sales of approximately $4,696 million. Key NCB brands in this segment include Snapple, Hawaiian Punch, Mott's, FIJI mineral water, Clamato, Yoo-Hoo, Deja Blue, Bai Brands, ReaLemon, AriZona tea, Vita Coco coconut water, Mr and Mrs T mixers, BodyArmor, Nantucket Nectars, Garden Cocktail, Mistic and Rose's. Key CSD brands in this segment include Dr Pepper, 7UP, Canada Dry, A&W, Sunkist soda, Squirt, RC Cola, Big Red, Vernors, Venom, IBC, Diet Rite and Sun Drop. 
Approximately 85% of our 2016 Packaged Beverages net sales of branded products come from our own brands and the bottling beverages and other products for private label owners or others, which is also referred to as contract manufacturing. The remaining portion of our 2016 Packaged Beverages net sales come from the distribution of third party brands such as Big Red, FIJI mineral water, Bai Brands, AriZona tea, Vita Coco coconut water, Body Armor, Neuro drinks, Core Hydration, Sparkling Fruit2O, Hydrive energy drinks and High Brew. Although the majority of our Packaged Beverages net sales relate to our brands, we also provide a route-to-market for these third party brand owners seeking effective distribution for their new and emerging brands. These brands give us exposure in certain markets to fast growing segments of the beverage industry with minimal capital investment.
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.

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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, fountains, mass merchandisers, club stores, vending machines, convenience stores, gas stations, small groceries, drug chains and dollar stores.
In 2016, 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 2016, our Latin America Beverages segment had net sales of $460 million, with our operations in Mexico representing approximately 89% of the net sales of this segment. Key brands include Peñafiel, Squirt, Aguafiel, Clamato and Crush.
In Mexico, we manufacture and distribute our products through our bottling operations and third party bottlers and distributors. In the Caribbean, we distribute our products through third party bottlers and distributors. We have also begun to distribute certain products in other international jurisdictions through various third party bottlers and distributors.
We sell our finished beverages through all major Mexican retail channels, including "mom and pop" stores, supermarkets, hypermarkets, convenience stores and on-premise channels.
In 2016, Walmart, the largest customer of our Latin America Beverages segment, accounted for approximately 11% of our net sales in this segment.
BOTTLER AND DISTRIBUTOR AGREEMENTS
In the U.S. and Canada, we generally grant perpetual, exclusive licenses 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, change in control or breach of agreements 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.
The following chart details the distribution sources of our total 288 fluid ounce cases sold in the U.S. in 2016:
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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.

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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 and certain affiliated bottlers 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 has enabled us to maintain strong relationships with major retailers in the U.S., Canada and Mexico. In 2016, 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, such as Coca-Cola and PepsiCo, with significant financial resources.
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We also compete against other large companies, including Nestlé, S.A. ("Nestle"), Kraft Foods Group, Inc. ("Kraft Foods") 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. Other bottlers and manufacturers could also expand their contract manufacturing. We also have 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, several of these companies are also our customers as they purchase beverage concentrates from us.

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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.
Our Trademarks.  Our trademark portfolio includes approximately 2,100 registrations and applications in the U.S., Canada, Mexico and other countries. As of December 31, 2016, brands we own through various subsidiaries in various jurisdictions include Dr Pepper, Canada Dry, Peñafiel, Squirt, 7UP, Crush, A&W, Schweppes, RC Cola, Sun Drop, Venom, Snapple, Hawaiian Punch, Mott's, Clamato, Aguafiel, Deja Blue, ReaLemon, Mistic, Mr & Mrs T and Nantucket Nectars. 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 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, Stewart's, Rose's, Orangina 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 for our Allied Brands.  We have rights in certain territories to bottle and/or distribute various brands we do not own. 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. As of December 31, 2016, our Allied Brand portfolio included, but was not limited to, the following brands:
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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 conduct 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. We also apply a marketing return on investment analysis to ensure we focus our marketing spend in a manner to drive profitable and sustainable growth in our key brands.
MANUFACTURING
As of December 31, 2016, we operated 23 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. Our manufacturing facilities consist of 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, and smaller bottling plants with a more limited range of packaging capabilities.

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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 2016, 91% of our manufactured volumes came from our brands and 9% from third party and private-label products. We also use third party manufacturers to package our products for us on a limited basis.
RAW MATERIALS
The principal raw materials we use in our business, which we commonly refer to as ingredients and packaging costs, are aluminum cans and ends, glass bottles, PET bottles and caps, paper products, sweeteners, juice, fruit, water and other ingredients. These ingredients and packaging costs can fluctuate substantially. As it relates to our costs of sales, these costs make up a significant portion of our costs, as shown below.
In addition, we are significantly impacted by changes in fuel costs, which can also fluctuate substantially, 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. 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.
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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 ingredients and packaging. 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.
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. Refer to Note 2 of the Notes to our Audited Consolidated Financial Statements for further information.
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.

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EMPLOYEES
As of December 31, 2016, we employed approximately 20,000 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 4,000 full-time employees, with approximately 2,000 employees party to collective bargaining agreements. We do not have a significant number of employees in Canada or overseas.
We believe we have good relations with our employees.
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. Certain cities and municipalities within the U.S. have also passed various taxes on the distribution of sugar-sweetened and diet beverages, which are at different stages of enactment. In Canada and Mexico, the manufacture, distribution, marketing and sale of many of our 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.
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 for plastic materials, 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 (the "Exchange Act"), as soon as reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission ("SEC").
MARKET AND INDUSTRY DATA
The market and industry data in this Annual Report on Form 10-K is from IRi, an independent industry source, and is based on retail dollar sales and sales volumes in 2016. Although we believe that this independent source is reliable, we have not verified the accuracy or completeness of this data or any assumptions underlying such data. IRi is a marketing information provider, primarily serving consumer packaged goods manufacturers and retailers. We use IRi 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. IRi 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 IRi include CSDs, energy drinks, carbonated waters, non-alcoholic mixers and NCBs, including ready-to-drink teas, single-serve and multi-serve juice and juice drinks, sports drinks and still waters. IRi also provides data on other food items such as apple sauce. IRi data we present in this report is from IRi 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.

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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, the use of artificial sweeteners in diet CSDs and the use of natural, organic or simple ingredients in LRB products. 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 and quickly develop new products or partner with an allied brand in that category in response, then 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.
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 43.3% of the U.S. LRB market by retail sales according to IRi. We also compete against other large companies, including Nestle, Kraft Foods 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 also compete for contract manufacturing with other bottlers and manufacturers. 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 potentially reduce our prices or increase our spending on marketing, advertising and product innovation, which could negatively affect our business and financial performance.
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.

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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 ("SOP"). 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 price increases through 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 distribution agreements with our allied brands could be terminated.
Approximately 85% of our 2016 Packaged Beverages net sales of branded products come from our owned and licensed brands and our contract manufacturing, with the remaining from the distribution of third party brands such as, but not limited to, Big Red, FIJI mineral water, BAI Brands, AriZona tea, Vita Coco coconut water, Body Armor, Neuro drinks, Core Hydration, Sparkling Fruit2O, Hydrive energy drinks and High Brew. We are subject to a risk of our allied brands, other than Bai Brands, terminating their distribution agreements with us, which could negatively affect our business and financial performance. Within each distribution agreement, we have certain protections in case the allied brands terminate the distribution agreements, including a one-time termination payment.
Costs for commodities, such as raw materials and energy, may change 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 changes 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.
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. Furthermore, price decreases in commodities that we have effectively hedged could also increase our cost of goods sold for mark-to-market changes in the derivative instruments.
New or proposed beverage taxes or regulations could impact our sales.
During 2013, the government of Mexico enacted broad based tax reform, including a one peso per liter tax on the manufacturing of certain sugar-sweetened and other beverages, which went into effect January 1, 2014. Since 2014, a number of local governments within the U.S., including Philadelphia, San Francisco and Cooke County, Illinois, have imposed taxes on the distribution of certain sugar-sweetened beverages. These regressive taxes were primarily the result of concerns about the public health consequences and health care costs associated with obesity. Federal, state, and other local and 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.


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If we do not successfully integrate and manage our acquired businesses or brands, our operating results may adversely be affected.

From time to time, we acquire businesses, such as Bai Brands, or brands to expand our beverage portfolio and distribution rights. We may incur unforeseen liabilities and obligations in connection with the acquisition, integration or management of the acquired businesses or brands and may encounter unexpected difficulties and costs in integrating them into our operating and internal control structures. We may also experience delays in extending our internal control over financial reporting to newly acquired businesses, which may increase the risk of failure to prevent misstatements in their financial records and in our consolidated financial statements. Our financial performance depends in large part on how well we can manage and improve the performance of acquired businesses or brands. We cannot assure you, however, that we will be able to achieve our strategic and financial objectives for such acquisitions. If we are unable to achieve such objectives, our consolidated results could be negatively affected.
Determinations in the future that a significant impairment of the value of our goodwill and other indefinite-lived intangible assets has occurred could have a material adverse effect on our results of operations.
As of December 31, 2016, we had $9,791 million of total assets, of which approximately $5,649 million were goodwill and other intangible assets. On January 31, 2017, we completed the Bai Brands Merger with a preliminary purchase price of $1,649 million, net of our previous ownership interest, of which we expect a significant portion of the consideration will be allocated to goodwill and intangible assets, further increasing these amounts. Intangible assets include both definite and indefinite-lived intangible assets in connection with brands, 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 were no impairment charges required based upon our annual impairment analysis performed as of October 1, 2016. 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 Note 2 and Note 7 to 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 and/or the product category; (ii) higher commodity prices; (iii) lower prices for our products or increased marketing as a result of increased competition; (iv) significant disruptions to our operations as a result of both internal and external events; and (v) changes in our discount rates. 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 adversely affect our results of operations and increase our effective tax rate.
Our total indebtedness, excluding capital lease obligations, 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, 2016, our total indebtedness was $4,478 million, which includes the financing for the Bai Brands Merger.
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.

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In assessing our credit strength, credit rating agencies consider our capital structure and financial policies as well as our results of operations and financial position at that time. If our credit ratings were to be downgraded as a result of changes in our capital structure, changes in the credit rating agencies' methodology in assessing our credit strength, the credit agencies' perception of the impact of credit market conditions on our current or future results of operations and financial position or for any other reason, our cost of borrowing could increase.
Fluctuations in foreign currency exchange rates in Mexico and Canada may adversely affect our operating results.
While our operations are predominately in the U.S., we are exposed to foreign currency exchange rate risk with respect to our sales, expenses, profits, assets and liabilities denominated in the Mexican peso or the Canadian dollar. We manage a small portion of our exposure to the Canadian dollar and Mexican peso for certain transactions utilizing derivative instruments and are not protected against most foreign currency fluctuations. As a result, our financial performance may be affected by changes in foreign currency exchange rates. Moreover, any favorable or unfavorable impacts to gross profit, gross margin, income from operations or segment operating profit from fluctuations in foreign currency exchange rates are likely to be inconsistent year over year.
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.
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, 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.
As cybersecurity attacks continue to evolve and increase, our information systems could also be penetrated or compromised by internal and external parties intent on extracting confidential information, disrupting business processes or corrupting information. These risks could arise from external parties or from acts or omissions of internal or service provider personnel. Such unauthorized access could disrupt our business and could result in the loss of assets, litigation, remediation costs, damage to our reputation and failure to retain or attract customers following such an event, which could adversely affect our business.
Increases in our cost of benefits 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.

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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 of operations.
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, cybersecurity attacks 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, cybersecurity attacks 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 federal or state regulations or laws affecting the labeling of our products, 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.

17


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.
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 not meet these standards or could 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, 2016, 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.


18


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.
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.



19


ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
As of December 31, 2016, we owned or leased 146 office buildings, manufacturing facilities 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.
The following table summarizes our significant properties by geography and by reportable 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
12

 
6

 
1

 

 

 

 
19

Principal distribution centers and warehouse facilities
37

 
59

 

 

 

 

 
96

 
50

 
73

 
2

 

 

 

 
125

Mexico and Canada:
 
 
 
 
 
 
 
 
 
 
 
 
 
Office buildings

 
1

 

 

 

 
1

 
2

Manufacturing facilities

 

 

 

 
4

 

 
4

Principal distribution centers and warehouse facilities

 

 

 

 
3

 
12

 
15

 

 
1

 

 

 
7

 
13

 
21

Total
50

 
74

 
2

 

 
7

 
13

 
146

____________________________
(1)
The office building owned by our Beverage Concentrates operating segment is our corporate headquarters located in Plano, Texas.
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.

20


PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
In the U.S., 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, 2016 and 2015, and the frequency and amount of dividends declared on our stock during these periods, is set forth in Note 23 of the Notes to our Audited Consolidated Financial Statements and incorporated herein by reference.
As of February 10, 2017, there were approximately 13,000 stockholders of record of our common stock. This figure does not include a substantially greater number of beneficial 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 18, 2017, to be filed with the SEC, is incorporated herein by reference.
For the years ended December 31, 2016, 2015 and 2014, we did not sell any equity securities that were not registered under the Securities Act of 1933, as amended (the "Securities Act").
DIVIDEND POLICY
Our Board of Directors (our "Board") declared aggregate dividends of $2.12, $1.92 and $1.64 per share on outstanding common stock during the years ended December 31, 2016, 2015 and 2014, 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.

21


COMMON STOCK REPURCHASES
Prior to January 1, 2014, our Board authorized the repurchase of an aggregate amount of up to $3 billion of our outstanding common stock. We exhausted these authorizations prior to December 31, 2015.
On February 5, 2015, our Board authorized the repurchase of an additional $1 billion of our outstanding common stock.
On February 11, 2016, our Board authorized the repurchase of an additional $1 billion of our outstanding common stock.
We repurchased approximately 5.7 million shares of our common stock, valued at approximately $519 million, in the year ended December 31, 2016. Our share repurchase activity, on a monthly basis, for the quarter ended December 31, 2016 was as follows:
(in thousands, except per share data)
 
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 (1)
Period
 
 
 
 
October 1, 2016 – October 31, 2016
 
80

 
$
86.86

 
80

 
$
1,184,255

November 1, 2016 – November 30, 2016
 

 

 

 
1,184,255

December 1, 2016 – December 31, 2016
 
600

 
87.12

 
600

 
1,131,960

For the quarter ended December 31, 2016
 
680

 
87.09

 
680

 
 
____________________________
(1)
As previously disclosed, the Board has active authorizations, as of December 31, 2016, for us to purchase an amount of up to $5 billion 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, 2016, there was a remaining balance of $1,132 million authorized for repurchase that had not been utilized.


22


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, 2011, with dividends reinvested quarterly.

Comparison of Total Returns
Assumes Initial Investment of $100
dps10kx1231chartx218985yra04.jpg

The Peer Group Index consists of the following companies: Coca-Cola, PepsiCo, Monster Beverage Corporation, Cott Corporation and National Beverage Corp. We believe that these companies help to convey an accurate assessment of our performance as compared to the industry.

23


ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected historical financial data for the years ended December 31, 2016, 2015, 2014, 2013 and 2012. 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,
 
2016
 
2015
 
2014
 
2013
 
2012
(in millions, except per share data)

 
Statements of Income Data:
 

 
 

 
 

 
 

 
 

Net sales
$
6,440

 
$
6,282

 
$
6,121

 
$
5,997

 
$
5,995

Gross profit
3,858

 
3,723

 
3,630

 
3,498

 
3,495

Income from operations
1,433

 
1,298

 
1,180

 
1,046

 
1,092

Net income
847

 
764

 
703

 
624

 
629

Basic earnings per share(1)
$
4.57

 
$
4.00

 
$
3.59

 
$
3.08

 
$
2.99

Diluted earnings per share(1)
4.54

 
3.97

 
3.56

 
3.05

 
2.96

Dividends declared per share
2.12

 
1.92

 
1.64

 
1.52

 
1.36

Statements of Cash Flows Data:
 
 
 
 
 
 
 
 
 
Cash provided by (used in):
 
 
 
 
 
 
 
 
 
Operating activities(2)
$
939

 
$
991

 
$
1,022

 
$
866

 
$
482

Investing activities
(189
)
 
(194
)
 
(185
)
 
(195
)
 
(217
)
Financing activities(3)
130

 
(114
)
 
(747
)
 
(880
)
 
(603
)

 
As of December 31,
 
2016
 
2015
 
2014
 
2013
 
2012
(in millions)
 
Balance Sheet Data:
 
 
 
 
 
 
 
 
 
Total assets(3)
$
9,791

 
$
8,869

 
$
8,265

 
$
8,191

 
$
8,916

Short-term borrowings and current portion of long-term obligations
10

 
507

 
3

 
66

 
250

Long-term obligations(3)
4,468

 
2,875

 
2,580

 
2,498

 
2,542

Other non-current liabilities
2,138

 
2,228

 
2,353

 
2,386

 
2,862

Total stockholders’ equity
2,134

 
2,183

 
2,294

 
2,277

 
2,280

____________________________
(1)
The weighted average number of shares of common stock 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, 2016, 2015, 2014, 2013 and 2012, we repurchased and retired 5.7 million shares, 6.5 million shares, 6.8 million shares, 8.7 million shares and 9.5 million shares, respectively.
(2)
For the year ended December 31, 2012, operating activities were impacted by $531 million in tax payments resulting from the licensing agreements with PepsiCo and Coca-Cola.
(3)
For the year ended December 31, 2016, financing activities, total assets, and long-term obligations were impacted by the issuance of senior unsecured notes with an aggregate principal amount of $1,550 million, which were issued in December 2016 in anticipation of the Bai Brands Merger.

24


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 
You should read the following discussion in conjunction with our Audited Consolidated Financial Statements and the related Notes thereto included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that are based on management's current expectations, estimates and projections about our business and operations. Our actual results may differ materially from those currently anticipated and expressed in such forward-looking statements as a result of various factors including the factors we describe under "Special Note Regarding Forward-Looking Statements", "Risk Factors" and elsewhere in this Annual Report on Form 10-K, including documents incorporated by reference.
References in the following discussion to "we", "our", "us", "DPS" or "the Company" refer to Dr Pepper Snapple Group, Inc. and all entities included in our Audited Consolidated Financial Statements.
The periods presented in this section are the years ended December 31, 2016, 2015 and 2014, which we refer to as "2016", "2015" and "2014", respectively.
OVERVIEW
We are a leading integrated brand owner, manufacturer and distributor of non-alcoholic beverages in the U.S., Canada and Mexico with a diverse portfolio of flavored (non-cola) CSDs and NCBs, including ready-to-drink teas, juices, juice drinks, water and mixers. Our brand portfolio includes popular CSD brands such as Dr Pepper, Canada Dry, Peñafiel, Squirt, 7UP, Crush, A&W, Sunkist soda and Schweppes, and NCB brands such as Snapple, Hawaiian Punch, Mott's, Clamato, Bai Brands, Mr & Mrs T mixers and Rose's. Our largest brand, Dr Pepper, is a leading flavored CSD in the U.S. according to IRi. We have some of the most recognized beverage brands in North America, with significant consumer awareness levels and long histories that evoke strong emotional connections with consumers. 
We operate as an integrated brand owner, manufacturer and distributor through our three segments. We believe our integrated business model strengthens our route-to-market and provides opportunities for net sales and profit growth through the alignment of the economic interests of our brand ownership and our manufacturing and distribution businesses through both our DSD system and our WD delivery system. Our integrated business model enables us to be more flexible and responsive to the changing needs of our large retail customers and allows us to more fully leverage our scale and reduce costs by creating greater geographic manufacturing and distribution coverage.
We operate primarily in the U.S., Mexico and Canada and we also distribute our products in the Caribbean. In 2016, 90% of our net sales were generated in the U.S., 7% in Mexico and the Caribbean and 3% in Canada.
UNCERTAINTIES AND TRENDS AFFECTING OUR BUSINESS
We believe the North American LRB market is influenced by certain key trends and uncertainties. Some of these items, such as increased health consciousness and changes in economic factors, have created category headwinds for our CSDs during recent years. The key trends and uncertainties that could affect our business include:
Increased health consciousness. Consumers are increasingly becoming more concerned about health and wellness, focusing on caloric intake and sugar content in both regular CSDs and juices, the use of artificial sweeteners in diet CSDs and the use of natural, organic or simple ingredients in LRB products. We believe the main beneficiaries of this trend include bottled waters, naturally sweetened, low calorie drinks, all natural and organic beverages and ready-to-drink teas. Our completion of the Bai Brands Merger on January 31, 2017 will allow us to continue distribution and capture additional growth as a result of this key trend.
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.

25


Fluctuations in foreign exchange rates. We are exposed to foreign currency exchange rate variability in the expected future cash flows associated with certain third-party and intercompany transactions denominated in currencies other than our Mexican and Canadian entities' functional currencies. We use derivative instruments such as foreign exchange forward contracts to mitigate a portion of our exposure in these expected future cash flows to changes in foreign exchange rates. Significant changes in these exchange rates will impact our results of operations.
Increased government regulation. Government agencies, as a result of concerns about the public health consequences and health care costs associated with obesity, have been proposing and, in some cases, enacting new taxes or regulations on sugar-sweetened and diet beverages. Any changes of regulations or imposed taxes could reduce demand and/or cause us to raise our prices.
Volatility in the costs of raw materials.  The costs of a substantial portion of the raw materials used in the beverage industry are dependent on commodity prices for resin, aluminum, diesel fuel, corn, apple juice concentrate, sucrose, natural gas and other commodities. We are also dependent on commodity prices for apples related to our applesauce production. Commodity price volatility has, from time to time, exerted pressure on industry margins and operating results.
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.
As a result of these uncertainties and other factors, we currently believe the following guidance for the year ending December 31, 2017 compared to the year ended December 31, 2016:
Net sales could increase approximately 4.5%, which includes a 3.0% increase in net sales due to the Bai Brands Merger and a 1.0% unfavorable foreign currency translation impact.
Non-cash costs related to the Bai Brands Merger are expected to reduce income from operations between $33 million - $36 million.
Excluding the Bai Brands Merger, packaging and ingredient costs for the year ending December 31, 2017 are expected to increase 0.5% on a constant volume/mix basis as compared to the year ended December 31, 2016.
The adoption of a new accounting standard will result in incremental income tax benefit of approximately $14 million.
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 Mexico, the Caribbean and other international markets from the manufacture and distribution of concentrates, syrup and finished beverages.
Segment results are based on management reports. Net sales and SOP are the significant financial measures used to assess the operating performance of our operating segments.

26


VOLUME
In evaluating our performance, we consider different volume measures depending on whether we sell beverage concentrates or finished beverages.
Beverage Concentrates Sales Volume
In our Beverage Concentrates segment, we measure our sales volume in two ways: (1) "concentrate case sales" and (2) "bottler case sales." The unit of measurement for both concentrate case sales and bottler case sales equals 288 fluid ounces of finished beverage, the equivalent of 24 twelve ounce servings.
Concentrate case sales represent units of measurement for concentrates sold by us to our bottlers and distributors. A concentrate case is the amount of concentrate needed to make one case of 288 fluid ounces of finished beverage. It does not include any other component of the finished beverage other than concentrate. Our net sales in our concentrate businesses are based on our sales of concentrate cases.
Although net sales in our concentrate businesses are based on concentrate case sales, we believe that bottler case sales are also a significant measure of our performance because they measure sales of packaged beverages into retail channels.
Packaged Beverages and Latin America Beverages Sales Volume
In our Packaged Beverages and Latin America Beverages segments, we measure volume as case sales to customers. A case sale represents a unit of measurement equal to 288 fluid ounces of packaged beverage sold by us. Case sales include both our owned brands and certain brands licensed to and/or distributed by us.
Volume in Bottler Case Sales
In addition to sales volume, we measure volume in bottler case sales ("volume (BCS)") as sales of packaged beverages, in equivalent 288 fluid ounce cases, sold by us and our bottling partners to retailers and independent distributors. Our contract manufacturing sales are not included or reported as part of volume (BCS).
Bottler case sales and concentrates and packaged beverage sales volumes are not equal during any given period due to changes in bottler concentrates inventory levels, which can be affected by seasonality, bottler inventory and manufacturing practices and the timing of price increases and new product introductions.

27


RESULTS OF OPERATIONS
Executive Summary - 2016 Financial Overview and Recent Developments
dps-10kx1231_chartx50332a04.jpg        dps-10kx1231_chartx51260a04.jpg
dps-10kx1231_chartx52123a04.jpg        dps-10kx1231_chartx52981a04.jpg
On November 21, 2016, we entered into the Merger Agreement with Bai Brands whereby we agreed to acquire Bai Brands for consideration of approximately $1,700 million, subject to certain adjustments in the Merger Agreement.
On January 31, 2017, we completed the Bai Brands Merger and paid $1,548 million, net of the Company's previous ownership interest, and held back $103 million, which was placed in escrow, in exchange for the remaining ownership interests and seller transaction costs. As a result, our existing equity interest in Bai Brands was remeasured to fair value, which resulted in a gain of $28 million, which will be recognized in the first quarter of 2017 and included in other operating (income) expense, net.
During the fourth quarter of 2016, we completed the issuance of senior unsecured notes with an aggregate principal amount of $1,550 million. The net proceeds from the offering, together with cash on hand, funded the Bai Brands Merger.
During the fourth quarter of 2016, we redeemed a portion of the 6.82% senior notes due on May 1, 2018 (the "2018 Notes") and retired, at a premium, an aggregate principal amount of approximately $360 million. The loss on early extinguishment of the 2018 Notes was approximately $31 million.
During the years ended December 31, 2016, 2015, and 2014, we repurchased 5.7 million, 6.5 million, and 6.8 million shares of our common stock, respectively, valued at approximately $519 million in 2016, $521 million in 2015, and $400 million in 2014.
During the first quarter of 2017, our Board declared a dividend of $0.58 per share, which will be paid on April 5, 2017, to shareholders of record as of March 14, 2017. The dividend declared during the first quarter of 2017 increased approximately 9.4% compared to the dividend declared in the previous quarter.
We expect to repurchase $450 million to $500 million of our common stock during the year ending December 31, 2017.

28


References in the financial tables to percentage changes that are not meaningful are denoted by "NM."
Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
Consolidated Operations
The following table sets forth our consolidated results of operations for the years ended December 31, 2016 and 2015:
 
For the Year Ended December 31,
 
 
 
 
 
2016
 
2015
 
Dollar
 
Percentage
(dollars in millions, except per share data)
Dollars
 
Percent
 
Dollars
 
Percent
 
Change
 
Change
Net sales
$
6,440

 
100.0
 %
 
$
6,282

 
100.0
 %
 
$
158

 
3
%
Cost of sales
2,582

 
40.1

 
2,559

 
40.7

 
23

 
1

Gross profit
3,858

 
59.9

 
3,723

 
59.3

 
135

 
4

Selling, general and administrative expenses
2,329

 
36.2

 
2,313

 
36.8

 
16

 
1

Other operating (income) expense, net
(3
)
 

 
7

 
0.1

 
(10
)
 
NM

Income from operations
1,433

 
22.3

 
1,298

 
20.7

 
135

 
10

Interest expense
147

 
2.3

 
117

 
1.9

 
30

 
26

Loss on early extinguishment of debt
31

 
0.5

 

 

 
31

 
NM

Other income, net
(25
)
 
(0.4
)
 
(1
)
 

 
(24
)
 
NM

Income before provision for income taxes and equity in earnings of unconsolidated subsidiaries
1,283

 
19.9

 
1,184

 
18.8

 
99

 
8

Provision for income taxes
434

 
6.7

 
420

 
6.7

 
14

 
3

Net income
847

 
13.2
 %
 
764

 
12.2
 %
 
83

 
11
%
Effective tax rate
33.8
%
 
NM

 
35.5
%
 
NM

 
NM

 
NM

Volume (BCS). Volume (BCS) increased 1% for the year ended December 31, 2016 compared with the year ended December 31, 2015. In the U.S. and Canada, volume was 1% higher, and in Mexico and the Caribbean, volume increased 5%, compared with the prior year. Both Branded CSD and NCB volume increased 1% compared to the prior year.
In branded CSDs, Squirt increased 6% primarily driven by increased sales to third-party bottlers and product innovation in our Latin America Beverages segment and our Hispanic strategy in the U.S. Schweppes grew 8% reflecting distribution gains in our sparkling water and growth in the ginger ale category. Dr Pepper had gains of 1% driven primarily by increases in our fountain business. Regular Dr Pepper increased compared to the prior year, which was partially offset by declines in diet. Peñafiel increased 3% in our Latin America Beverages segment as a result of distribution gains, increased promotional activity and product innovation, partially offset by increased competition. Crush grew 3% in the current year. These gains were partially offset by a 2% decline in our other CSD brands compared to the prior year. Canada Dry, 7UP, A&W and Sunkist soda (our "Core 4 brands") were flat compared to the prior year, driven by an 6% increase in Canada Dry fully offset by a 5% decline in 7UP, a 2% decrease in A&W and a 1% decline in Sunkist soda.
In branded NCBs, our water category increased 18% primarily due to incremental promotional activity behind Bai Brands primarily in our club channel, distribution gains for Bai Brands, Fiji and Core Hydration, and an increase in Aguafiel due to category growth in Mexico. Clamato increased 10% primarily due to increased promotional activity, distribution gains, and product innovation in our Latin America Beverages segment and increased promotional activity in the U.S.. These increases were partially offset by declines in Hawaiian Punch, Mott's and our other NCB brands in total. Hawaiian Punch declined 6% due to category headwinds and higher pricing for our single-serve packages while Mott's decreased 3% due to declines in the juice category and higher pricing for our single-serve packages, partially offset by gains in our sauce products. Our other NCB brands in total declined 8%. Snapple was flat compared to prior year.

29


Net Sales. Net sales increased $158 million, or approximately 3%, for the year ended December 31, 2016, compared with the year ended December 31, 2015. The primary drivers of the increase in net sales included:
favorable product and package mix, which increased net sales by about 2.5%;
increase in shipments, which increased net sales by 1.0%;
higher pricing, which increased net sales by 1.0%;
unfavorable foreign currency translation of $79 million, which decreased net sales by 1.0%; and
unfavorable segment mix, which decreased net sales by 0.5%.
Gross Profit. Gross profit increased $135 million, or approximately 4%, for the year ended December 31, 2016 compared with the year ended December 31, 2015. Gross margin was 59.9% for the year ended December 31, 2016 compared to the gross margin of 59.3% for the year ended December 31, 2015. The following drivers impacted the gross margin:
favorable comparison in our mark-to-market activity on commodity derivative contracts, which increased our gross margin by 0.5%.
lower commodity costs, led by packaging, and the change in our last-in, first-out ("LIFO") inventory provision, which increased our gross margin by 0.5%;
increase in our net pricing, which increased our gross margin by 0.4%;
ongoing productivity improvements, which increased our gross margin by 0.4%;
unfavorable product, package and segment mix, which decreased our gross margin by 0.7%;
unfavorable foreign currency effects, which decreased our gross margin by 0.3%; and
increase in our other manufacturing costs, which decreased our gross margin by 0.2%.
The favorable mark-to-market activity on commodity derivative contracts for the year ended December 31, 2016 was $21 million in unrealized gains versus $13 million in unrealized losses in the prior year.
Selling, General and Administrative Expenses. Selling, general and administrative ("SG&A") expenses increased $16 million for the year ended December 31, 2016 compared with the prior year. The increase was primarily driven by higher people costs, a $4 million arbitration award related to our Mexican joint venture, increased professional fees, a non-recurring charge of $4 million related to the transition of a certain employee benefit program and increases in other miscellaneous expenses. These increases were partially offset by lower logistics costs, driven by fuel rates, the impact of favorable foreign currency effects, which decreased SG&A expenses by $27 million, and a $23 million favorable comparison in the mark-to-market activity on commodity derivative contracts. For the year ended December 31, 2016, we recognized $31 million in unrealized gains related to the mark-to-market activity on commodity derivative contracts versus $8 million in unrealized gains in the year ago period.
Other Operating (Income) Expense, Net. Other operating (income) expense, net had a favorable change of $10 million due primarily to the $7 million favorable comparison related to the brand value impairment of Garden Cocktail recognized in the prior year and a $5 million gain on the step-acquisition of Industria Embotelladora de Bebidas Mexicanas ("IEBM") and Embotelladora Mexicana de Agua, S.A. de C.V. ("EMA").
Income from Operations. Income from operations increased $135 million to $1,433 million for the year ended December 31, 2016, due primarily to the increase in gross profit, the favorable change in other operating (income) expense, net and the decrease in depreciation and amortization, driven by certain fully depreciated fixed assets. These drivers were partially offset by the increase in SG&A expenses.

30


Interest Expense. Interest expense increased $30 million for the year ended December 31, 2016 compared with the year ended December 31, 2015, primarily driven by:
$12 million of mark-to-market activity recorded during the fourth quarter of 2016 for four derivative instruments, as the hedging relationships between the four outstanding interest rate swaps and our 2.70% senior notes due November 15, 2022 were de-designated on October 1, 2016;
$5 million of amortization of deferred financing costs associated with the 364-day bridge loan facility (the "Bridge Facility");
higher average debt balance and higher average interest rates attributable to the issuance of our 3.40% senior notes due November 15, 2025 (the "2025 Notes") and 4.50% senior notes due November 15, 2045 (the "2045 Notes") during the fourth quarter of 2015; and
the issuance of the senior unsecured notes during the fourth quarter of 2016 for the Bai Brands Merger.
Loss on Early Extinguishment of Debt. In October 2016, we redeemed a portion of the 2018 Notes and retired, at a premium, an aggregate principal amount of approximately $360 million with the proceeds from the issuance of our 2.55% senior notes due on September 15, 2026 (the "2026 Notes"). The loss on early extinguishment of the 2018 Notes, which primarily represented the redemption premium, was approximately $31 million. There was no loss on early extinguishment of debt in 2015.
Other Income, Net. Other income, net increased $24 million for the year ended December 31, 2016 compared with the year ended December 31, 2015 driven primarily by a $21 million gain on the extinguishment of a multi-employer pension plan withdrawal liability.
Effective Tax Rate. The effective tax rates for the year ended December 31, 2016 and 2015 were 33.8% and 35.5%, respectively. For the year ended December 31, 2016, the provision for income taxes included an income tax benefit of $17 million driven primarily by a restructuring of the ownership of our Canadian business. The income tax benefit includes a valuation allowance release of $11 million.

31


Results of Operations by Segment
The following tables set forth net sales and SOP for our segments for the years ended December 31, 2016 and 2015, as well as the other amounts necessary to reconcile our total segment results to our consolidated results presented in accordance with U.S. GAAP:
 
For the Year Ended
 
December 31,
 (in millions)
2016
 
2015
Segment Results — Net sales
 
 
 
Beverage Concentrates
$
1,284

 
$
1,241

Packaged Beverages
4,696

 
4,544

Latin America Beverages
460

 
497

Net sales
$
6,440

 
$
6,282

 
 
 
 
 
For the Year Ended
 
December 31,
(in millions)
2016
 
2015
Segment Results — SOP
 
 
 
Beverage Concentrates
$
834

 
$
807

Packaged Beverages
771

 
709

Latin America Beverages
78

 
88

Total SOP
1,683

 
1,604

Unallocated corporate costs
253

 
299

Other operating (income) expense, net
(3
)
 
7

Income from operations
1,433

 
1,298

Interest expense, net
144

 
115

Loss on early extinguishment of debt
31

 

Other income, net
(25
)
 
(1
)
Income before provision for income taxes and equity in (loss) earnings of unconsolidated subsidiaries
$
1,283

 
$
1,184

BEVERAGE CONCENTRATES
The following table details our Beverage Concentrates segment's net sales and SOP for the years ended December 31, 2016 and 2015:
 
For the Year Ended
 
 
 
 
 
December 31,
 
Dollar
 
Percentage
(in millions)
2016
 
2015
 
Change
 
Change
Net sales
$
1,284

 
$
1,241

 
$
43

 
3
%
SOP
834

 
807

 
27

 
3

Net Sales. Net sales increased $43 million for the year ended December 31, 2016, compared with the year ended December 31, 2015. The increase was due to higher pricing, a 1% increase in concentrate case sales, favorable product mix and lower discounts. These drivers were partially offset by $3 million of unfavorable foreign currency translation. The lower discounts were a result of a favorable comparison of the annual true-up of our estimated customer incentive liability partially offset by higher discounts driven by our fountain business.
SOP. SOP increased $27 million for the year ended December 31, 2016, compared with the year ended December 31, 2015, driven primarily by an increase in net sales partially offset by higher SG&A expenses. The increase in SG&A expenses was the result of a $6 million increase in planned marketing investments, higher people costs and increases in other operating costs.

32


Volume (BCS). Volume (BCS) increased 1% for the year ended December 31, 2016, compared with the year ended December 31, 2015. Schweppes had gains of 8% driven by distribution gains in our sparkling water and growth in the ginger ale category. Dr Pepper increased 1%, driven primarily by our fountain business. Regular Dr Pepper increased compared to the prior year, which was partially offset by declines in diet. Our Core 4 brands grew 1% compared to the prior year as a result of a 6% increase in Canada Dry, partially offset by a 6% decrease in 7UP, a 3% decline in Sunkist soda and a 2% decrease in A&W. Crush increased 3% for the current year. These increases were partially offset by a 7% decline in our other brands.
PACKAGED BEVERAGES
The following table details our Packaged Beverages segment's net sales and SOP for the years ended December 31, 2016 and 2015:
 
For the Year Ended
 
 
 
 
 
December 31,
 
Dollar
 
Percentage
(in millions)
2016
 
2015
 
Change
 
Change
Net sales
$
4,696

 
$
4,544

 
$
152

 
3
%
SOP
771

 
709

 
62

 
9

Volume. Sales volume was flat for the year ended December 31, 2016 as compared with the year ended December 31, 2015 as increases in our branded NCB volumes were fully offset by declines in our branded CSD volumes and contract manufacturing.
Branded CSD volumes decreased 1% for the year ended December 31, 2016 compared with the year ended December 31, 2015. Volume for our Core 4 brands decreased 1%, led by a 4% decrease in 7UP, a 3% decrease in A&W and a 1% decline in Sunkist soda, partially offset by a 6% increase in Canada Dry. Our other CSD brands decreased 6%. The decreases were partially offset by a 5% gain in Squirt. Dr Pepper was flat compared to the prior year as increases in regular were fully offset by declines in diet.
Branded NCB volumes increased 2% for the year ended December 31, 2016 compared with the year ended December 31, 2015. Our water category increased 23% primarily due to distribution gains for Bai Brands, Fiji and Core Hydration, and incremental promotional activity behind Bai Brands primarily in our club channel. Clamato and Snapple increased 5% and 1%, respectively. Our other NCB brands increased 3%, led by Body Armor and Venom. These increases were partially offset by a 5% decline in Hawaiian Punch due to category headwinds and higher pricing for our single-serve packages and a 3% decrease in Mott's due to declines in the juice category and higher pricing for our single-serve packages, partially offset by gains in our sauce products.
Contract manufacturing decreased 3% for the year ended December 31, 2016 compared with the year ended December 31, 2015.
Net Sales. Net sales increased $152 million for the year ended December 31, 2016 compared with the year ended December 31, 2015. Net sales increased due to favorable product and package mix, as a result of our NCBs, including our allied brands, and higher pricing.
SOP. SOP increased $62 million for the year ended December 31, 2016, compared with the year ended December 31, 2015, as a result of an increase in net sales partially offset by increases in cost of sales and SG&A expenses. Cost of sales increased due to higher costs associated with product mix, as a result of our NCBs, including our allied brands, partially offset by lower commodity costs, led by packaging, and ongoing productivity improvements. SG&A expenses increased due primarily to higher people costs, increased planned marketing investments, a non-recurring charge of $4 million related to the transition of a certain employee benefit program and increases in other operating costs. These increases were partially offset by reductions in our logistics costs, driven primarily by lower fuel rates, and lower incentive compensation.

33


LATIN AMERICA BEVERAGES
The following table details our Latin America Beverages segment's net sales and SOP for the years ended December 31, 2016 and 2015:
 
For the Year Ended
 
 
 
 
 
December 31,
 
Dollar
 
Percentage
(in millions)
2016
 
2015
 
Change
 
Change
Net sales
$
460

 
$
497

 
$
(37
)
 
(7
)%
SOP
78

 
88

 
(10
)
 
(11
)
Volume. Sales volume increased 5% for the year ended December 31, 2016 as compared with the year ended December 31, 2015. The increase in sales volume was primarily driven by a 7% gain in Squirt, due to increased sales to third party bottlers and product innovation. Peñafiel increased 3% as a result of distribution gains, increased promotional activity and product innovation, partially offset by increased competition. Clamato increased 20% due to increased promotional activity, distribution gains, and product innovation. Aguafiel and Crush increased 7% and 11%, respectively. Our other brands increased approximately 1%. These increases were partially offset by a decline in 7UP of 4%, driven by declines in Puerto Rico.
Net Sales. Net sales decreased $37 million for the year ended December 31, 2016 compared with the year ended December 31, 2015. Net sales decreased as a result of unfavorable foreign currency translation of $72 million, which was partially offset by increased sales volume and higher pricing.
SOP. SOP decreased $10 million for the year ended December 31, 2016 compared with the year ended December 31, 2015, driven by a decrease in net sales, partially offset by decreases in cost of sales and SG&A expenses. Cost of sales decreased in the current year primarily as a result of favorable foreign currency effects, ongoing productivity improvements, and lower commodity costs, led by sweeteners and packaging, which were partially offset by higher costs associated with increased sales volumes. SG&A expenses decreased in the current year primarily due to favorable foreign currency effects, which were partially offset by higher people costs, a $4 million arbitration award related to our former Mexican joint venture, increased professional fees, higher marketing investments, and increases in other operating costs. The impact of the favorable foreign currency effects, which decreased cost of sales and SG&A expenses, totaled $44 million.
Year Ended December 31, 2015 Compared to Year Ended December 31, 2014
Consolidated Operations
The following table sets forth our consolidated results of operations for the years ended December 31, 2015 and 2014:
 
For the Year Ended December 31,
 
 
 
 
 
2015
 
2014
 
Dollar
 
Percentage
(dollars in millions, except per share data)
Dollars
 
Percent
 
Dollars
 
Percent
 
Change
 
Change
Net sales
$
6,282

 
100.0
%
 
$
6,121

 
100.0
%
 
$
161

 
3
 %
Cost of sales
2,559

 
40.7

 
2,491

 
40.7

 
68

 
3

Gross profit
3,723

 
59.3

 
3,630

 
59.3

 
93

 
3

Selling, general and administrative expenses
2,313

 
36.8

 
2,334

 
38.1

 
(21
)
 
(1
)
Income from operations
1,298

 
20.7

 
1,180

 
19.3

 
118

 
10

Interest expense
117

 
1.9

 
109

 
1.8

 
8

 
7

Provision (benefit) for income taxes
420

 
6.7

 
371

 
6.1

 
49

 
13

Net income
764

 
12.2

 
703

 
11.5

 
61

 
9
 %
Effective tax rate
35.5
%
 
NM

 
34.6
%
 
NM

 
NM

 
NM

Volume (BCS). Volume (BCS) increased 2% for the year ended December 31, 2015 compared with the year ended December 31, 2014. In the U.S. and Canada, volume was 1% higher, and in Mexico and the Caribbean, volume increased 8%, compared with the year ago period. Branded CSD volume increased 1% while branded NCB volume was 4% higher compared to the prior year.

34


In branded CSDs, Peñafiel grew 14% in our Latin America Beverages segment as a result of distribution gains and increased promotional activity. Squirt increased 7% primarily driven by increased sales to third-party bottlers. Schweppes grew 9% reflecting distribution gains in our sparkling water and growth in the ginger ale category. These gains were partially offset by a 1% decrease in Dr Pepper, driven primarily by declines in our diet products, a 3% decrease in RC Cola and a 1% decline in Crush. Canada Dry, 7UP, A&W and Sunkist soda (our "Core 4 brands") were flat compared to the prior year, driven by an 8% increase in Canada Dry fully offset by a 6% decline in 7UP, a 4% decrease in Sunkist soda and a 1% decline in A&W. Our other CSD brands in total were also flat compared to the prior year.
In branded NCBs, our water category increased 13% due to distribution gains and product innovation for Bai Brands and marketing investments behind Fiji. Snapple grew 6% over last year primarily driven by product innovation and distribution gains. Clamato increased 12% primarily due to distribution gains and increased promotional activity in our Latin America Beverages segment. Hawaiian Punch grew 3% primarily as a result of package innovation. These increases were partially offset by a 1% decrease in Mott's and a 3% decline in our other NCB brands in total.
Net Sales. Net sales increased $161 million, or approximately 3%, for the year ended December 31, 2015 compared with the year ended December 31, 2014. The primary drivers of the increase were favorable product and package mix, an increase in branded sales volumes, favorable segment mix and higher pricing, partially offset by $115 million in unfavorable foreign currency translation.
Gross Profit. Gross profit increased $93 million, or approximately 3%, for the year ended December 31, 2015 compared with the year ended December 31, 2014. Although the gross margin for the year ended December 31, 2015 of 59.3% remain unchanged year over year, the following drivers impacted the gross margin:
lower commodity costs, led by packaging, and net of the change in our last-in, first-out ("LIFO") inventory provision, which increased our gross margin by 0.8%;
ongoing productivity improvements, which increased our gross margin by 0.5%;
decrease in our other manufacturing costs, which increased our gross margin by 0.2%;
increase in our net pricing, which increased our gross margin by 0.1%;
unfavorable product, package and segment mix, which decreased our gross margin by 0.7%;
unfavorable foreign currency effects, which decreased our gross margin by 0.5%; and
unfavorable comparison in our mark-to-market activity on commodity derivative contracts, which decreased our gross margin by 0.4%.
The unfavorable mark-to-market activity on commodity derivative contracts for the year ended December 31, 2015 was $13 million in unrealized losses versus $11 million in unrealized gains in the prior year.
SG&A Expenses. SG&A expenses decreased $21 million for the year ended December 31, 2015 compared with the prior year. The decrease was primarily driven by the impact of favorable foreign currency effects, which decreased SG&A expenses by $41 million, and a $32 million favorable comparison in the mark-to-market activity on commodity derivative contracts. For the year ended December 31, 2015, we recognized $8 million in unrealized gains related to the mark-to-market activity on commodity derivative contracts versus $24 million in unrealized losses in the year ago period. These drivers were partially offset by higher people costs, which were driven by inflationary increases and the impact of increased sales volumes, and higher performance-based incentive compensation.
Income from Operations. Income from operations increased $118 million to $1,298 million for the year ended December 31, 2015, due primarily to the increase in gross profit and decreases in SG&A expenses and depreciation and amortization, partially offset by a non-cash charge of $7 million for the brand value impairment of Garden Cocktail.
Interest Expense. Interest expense increased $8 million primarily driven by the impact of the issuance of our 3.40% senior notes due November 15, 2025 (the "2025 Notes") and 4.50% senior notes due November 15, 2045 (the "2045 Notes") during the fourth quarter of 2015.
Effective Tax Rate. The effective tax rates for the year ended December 31, 2015 and 2014 were 35.5% and 34.6%, respectively. The 2015 effective tax rate was higher, compared to the prior year, as a result of an income tax benefit in 2014 of $4 million due to the resolution of a tax audit in a foreign jurisdiction.

35


Results of Operations by Segment
The following tables set forth net sales and SOP for our segments for the years ended December 31, 2015 and 2014, as well as the other amounts necessary to reconcile our total segment results to our consolidated results presented in accordance with U.S. GAAP:
 
For the Year Ended
 
December 31,
(in millions)
2015
 
2014
Segment Results — Net sales
 
 
 
Beverage Concentrates
$
1,241

 
$
1,228

Packaged Beverages
4,544

 
4,361

Latin America Beverages
497

 
532

Net sales
$
6,282

 
$
6,121

 
 
 
 
 
 
 
 
 
For the Year Ended
 
December 31,
(in millions)
2015
 
2014
Segment Results — SOP
 
 
 
Beverage Concentrates
$
807

 
$
790

Packaged Beverages
709

 
636

Latin America Beverages
88

 
78

Total SOP
1,604

 
1,504

Unallocated corporate costs
299

 
323

Other operating expense, net
7

 
1

Income from operations
1,298

 
1,180

Interest expense, net
115

 
107

Other income, net
(1
)
 

Income before provision (benefit) for income taxes and equity in earnings of unconsolidated subsidiaries
$
1,184

 
$
1,073

BEVERAGE CONCENTRATES
The following table details our Beverage Concentrates segment's net sales and SOP for the years ended December 31, 2015 and 2014:
 
For the Year Ended
 
 
 
 
 
December 31,
 
Dollar
 
Percentage
(in millions)
2015
 
2014
 
Change
 
Change
Net sales
$
1,241

 
$
1,228

 
$
13

 
1
%
SOP
807

 
790

 
17

 
2

Net Sales. Net sales increased $13 million for the year ended December 31, 2015, compared with the year ended December 31, 2014. The increase was due to favorable mix, primarily driven by our fountain business, and higher pricing. The increases were partially offset by higher discounts primarily driven by our fountain business, unfavorable foreign currency translation of $11 million and a slight reduction in our concentrate case sales.
SOP. SOP increased $17 million for the year ended December 31, 2015, compared with the year ended December 31, 2014, driven primarily by an increase in net sales and a decrease in cost of sales. The decrease in cost of sales was primarily driven by a favorable LIFO comparison, favorable manufacturing and delivery costs, ongoing productivity improvements and lower commodity costs.

36


Volume (BCS). Volume (BCS) was flat for the year ended December 31, 2015 compared with the year ended December 31, 2014. Schweppes had gains of 8% driven by distribution gains in our sparkling water and growth in the ginger ale category. Our Core 4 brands increased 1% compared to the prior year as a result of a 7% increase in Canada Dry, partially offset by a 7% decrease in 7UP, a 4% decline in Sunkist soda and a 3% decrease in A&W. These increases were fully offset by decreases in Dr Pepper, Crush and our other brands. Dr Pepper decreased 1%, driven primarily by declines in our diet products. Crush decreased 1% for 2015. Our other brands declined 3%.
PACKAGED BEVERAGES
The following table details our Packaged Beverages segment's net sales and SOP for the years ended December 31, 2015 and 2014:
 
For the Year Ended
 
 
 
 
 
December 31,
 
Dollar
 
Percentage
(in millions)
2015
 
2014
 
Change
 
Change
Net sales
$
4,544

 
$
4,361

 
$
183

 
4
%
SOP
709

 
636

 
73

 
11

Volume. Branded CSD volumes were flat for the year ended December 31, 2015, compared with the year ended December 31, 2014. Squirt increased 5%, compared to the prior year, driven primarily by our Hispanic strategy. Volume for our Core 4 brands increased 1%, led by a 13% increase in Canada Dry and a 1% gain in A&W, partially offset by a 5% decrease in 7UP and a 3% decline in Sunkist soda. These increases were fully offset by 1% declines in Dr Pepper, driven primarily by declines in our diet products, RC Cola and our other CSD brands.
Branded NCB volumes increased 6% for the year ended December 31, 2015 compared with the year ended December 31, 2014. Our water category increased 22% primarily due to distribution gains for Bai Brands and marketing investments behind Fiji. Snapple gained 6% primarily driven by product innovation and distribution gains, while Hawaiian Punch increased 4% primarily as a result of package innovation. Clamato increased 6% while Mott's was flat. Our other NCB brands were 2% higher compared to the prior year, led by Venom.
Net Sales. Net sales increased $183 million for the year ended December 31, 2015 compared with the year ended December 31, 2014. Net sales increased due to favorable product mix, higher branded sales volumes and net pricing increases, partially offset by $22 million of unfavorable foreign currency translation.
SOP. SOP increased $73 million for the year ended December 31, 2015, compared with the year ended December 31, 2014, as a result of an increase in net sales partially offset by increases in cost of sales and SG&A expenses. Cost of sales increased as a result of higher costs associated with product mix and increased branded sales volumes. These increases in our cost of sales were partially offset by lower commodity costs, led by packaging, and ongoing productivity improvements. SG&A expenses increased due primarily to higher people costs, which were driven by inflationary increases and the impact of increased sales volumes. Other drivers of the change included an increase in litigation expense and higher incentive compensation, partially offset by favorable foreign currency effects. The increase in litigation expense was the result of various settlements agreed to during the year and the unfavorable comparison of a litigation provision reversed in the prior year. The impact of the favorable foreign currency effects, which decreased cost of sales and SG&A expenses, totaled $6 million.

37


LATIN AMERICA BEVERAGES
The following table details our Latin America Beverages segment's net sales and SOP for the years ended December 31, 2015 and 2014:
 
For the Year Ended
 
 
 
 
 
December 31,
 
Dollar
 
Percentage
(in millions)
2015
 
2014
 
Change
 
Change
Net sales
$
497

 
$
532

 
$
(35
)
 
(7
)%
SOP
88

 
78

 
10

 
13

Volume. Sales volume increased 8% for the year ended December 31, 2015 as compared with the year ended December 31, 2014. The increase in sales volume was primarily driven by a 14% increase in Peñafiel as a result of distribution gains and increased promotional activity. Squirt grew by 8% as a result of increased sales to third party bottlers. Clamato increased 22% due to distribution gains and increased promotional activity, while 7UP increased 4%. These increases were partially offset by declines in Crush and Aguafiel of 4% and 1%, respectively, while our other brands decreased 6%.
Net Sales. Net sales decreased $35 million for the year ended December 31, 2015 compared with the year ended December 31, 2014. Net sales decreased as a result of unfavorable foreign currency translation of $82 million, which was partially offset by increased sales volume.
SOP. SOP increased $10 million for the year ended December 31, 2015 compared with the year ended December 31, 2014, driven by decreases in cost of sales and SG&A expenses, which were partially offset by a decrease in net sales. Cost of sales decreased in 2015 primarily as a result of favorable foreign currency effects, ongoing productivity improvements, and lower commodity costs, led by packaging, which were partially offset by higher costs associated with increased sales volumes. SG&A expenses decreased in 2015 primarily due to favorable foreign currency effects and lower marketing investments, which were partially offset by higher logistics costs, driven by increased sales volumes. The impact of the favorable foreign currency effects, which decreased cost of sales and SG&A expenses, totaled $52 million.
LIQUIDITY AND CAPITAL RESOURCES
Trends and Uncertainties Affecting Liquidity
Customer and consumer demand for our products may be impacted by various risk factors discussed in Item 1A, "Risk Factors", including recession or other economic downturn in the U.S., Mexico and the Caribbean or Canada, which could result in a reduction in our sales volume. Similarly, disruptions in financial and credit markets may impact our ability to manage normal commercial relationships with our customers, suppliers and creditors. These disruptions could have a negative impact on the ability of our customers to timely pay their obligations to us, thus reducing our cash flow, or the ability of our vendors to timely supply materials.

38


We believe that the following events, trends and uncertainties may also impact liquidity:
the closing of the Bai Brands Merger in January 2017, which reduced our liquidity by approximately $1,653 million;
our continued repurchases of our outstanding common stock pursuant to our repurchase programs;
continued payment of dividends;
continued capital expenditures;
seasonality of our operating cash flows could impact short-term liquidity;
our ability to negotiate a new credit agreement to replace our existing credit facility which expires in September 2017;
our ability to issue unsecured commercial paper notes ("Commercial Paper") on a private placement basis up to a maximum aggregate amount outstanding at any time of $500 million;
fluctuations in our tax obligations;
future equity investments in allied brands; and
future mergers or acquisitions of regional bottling companies, distributors and/or distribution rights to further extend our geographic coverage.
Financing Arrangements
The following descriptions represent our available financing arrangements as of December 31, 2016. As of December 31, 2016, we were in compliance with all covenant requirements for our senior unsecured notes, unsecured credit agreement, commercial paper program and bridge financing commitment letter.
Commercial Paper Program
On December 10, 2010, we entered into a commercial paper program under which we may issue Commercial Paper on a private placement basis up to a maximum aggregate amount outstanding at any time of $500 million. The maturities of the Commercial Paper will vary, but may not exceed 364 days from the date of issuance. We issue Commercial Paper as needed for general corporate purposes. The program is supported by the Revolver (as defined below). Outstanding Commercial Paper reduces the amount of borrowing capacity available under the Revolver and outstanding amounts under the Revolver reduce the Commercial Paper availability. Under this program, we had weighted average Commercial Paper borrowings of $1 million, $23 million and $67 million for the years ended December 31, 2016, 2015 and 2014, respectively, with maturities of 90 days or less. These Commercial Paper borrowings had a weighted average rate of 0.65%, 0.50% and 0.23% for 2016, 2015 and 2014, respectively. As of December 31, 2016 and 2015, we had no Commercial Paper outstanding.
Unsecured Credit Agreement 
On September 25, 2012, we entered into a five-year unsecured credit agreement (the "Credit Agreement"), which provides for a $500 million revolving line of credit (the "Revolver"). Borrowings under the Revolver bear interest at a floating rate per annum based upon the alternate base rate ("ABR") or the Eurodollar rate, in each case plus an applicable margin which varies based upon our debt ratings. Rates range from 0.000% to 0.300% for ABR loans and from 0.795% to 1.300% for Eurodollar loans. The ABR is defined as the greater of (a) JPMorgan Chase Bank's prime rate, (b) the federal funds effective rate plus 0.500% and (c) the adjusted LIBOR for a one month interest period. The adjusted LIBOR is the London interbank offered rate for dollars adjusted for a statutory reserve rate set by the Board of Governors of the U.S. Federal Reserve System.
Additionally, the Revolver is available for the issuance of letters of credit and swingline advances not to exceed $75 million and $50 million, respectively. Swingline advances will accrue interest at a rate equal to the ABR plus the applicable margin. Letters of credit and swingline advances will reduce, on a dollar for dollar basis, the amount available under the Revolver.
We are currently in the process of negotiating a new credit agreement to replace the Credit Agreement, as it is maturing in September 2017.

39


The following table provides amounts utilized and available under the Revolver and each sublimit arrangement type as of December 31, 2016:
(in millions)
Amount Utilized
 
Balances Available
Revolver
$

 
$
500

Letters of credit

 
75

Swingline advances

 
50

The Credit Agreement further provides that we may request at any time, subject to the satisfaction of certain conditions, that the aggregate commitments under the facility be increased by a total amount not to exceed $250 million.
The Credit Agreement's representations, warranties, covenants and events of default are generally customary for investment grade credit and include a financial covenant that requires us to maintain a ratio of consolidated total debt (as defined in the Credit Agreement) to annualized consolidated EBITDA (as defined in the Credit Agreement) of no more than 3.00 to 1.00, tested quarterly. Upon the occurrence of an event of default, among other things, amounts outstanding under the Credit Agreement may be accelerated and the commitments may be terminated. Our obligations under the Credit Agreement are guaranteed by certain of our direct and indirect domestic subsidiaries on the terms set forth in the Credit Agreement. The Credit Agreement has a maturity date of September 25, 2017; however, with the consent of lenders holding more than 50% of the total commitments under the Credit Agreement and subject to the satisfaction of certain conditions, we may extend the maturity date for up to two additional one-year terms.
A facility fee is payable quarterly to the lenders on the unused portion of the commitments available under the Revolver equal to 0.08% to 0.20% per annum, depending upon our debt ratings.
Bridge Financing for Bai Brands
On November 21, 2016, the Company entered into the Bridge Facility in an aggregate principal amount of up to $1,700 million, in order to ensure that financing would be available for the Bai Brands Merger. Refer to Note 9 of the Notes to our Audited Consolidated Financial Statements for information on fees incurred in connection with the Bridge Facility.
The capacity of the Bridge Facility is reduced dollar-for-dollar by the consummation of any debt or equity offerings or any asset sales, as defined in the Commitment Letter filed in our Form 8-K on November 23, 2016. The issuance of four tranches of senior unsecured notes, consisting of the 2021-B Notes for $250 million, the 2023 Notes for $500 million, the 2027 Notes for $400 million and the 2046 Notes for $400 million (collectively, the "Acquisition Notes") in December 2016 reduced the capacity of the Bridge Facility by the net proceeds received of $1,541 million, and as of December 31, 2016, $159 million remained available to the Company under the Bridge Facility. On January 31, 2017, in accordance with its terms, the remaining commitment under the Bridge Facility was automatically terminated upon the Company's funding of the Bai Brands Merger with the net proceeds from the Acquisition Notes and cash on hand.
Shelf Registration Statement

On August 10, 2016, our Board authorized us to issue up to $2,000 million of securities from time to time. Subsequently, we filed a "well-known seasoned issuer" shelf registration statement with the SEC, effective September 2, 2016, which registers an indeterminable amount of securities for future sales. On November 16, 2016, the Board increased the authorized aggregate amount of securities available to be issued by an additional $400 million. As of December 31, 2016, we have issued senior unsecured notes of $1,950 million, as described in Note 9 of the Notes to our Audited Consolidated Financial Statements, leaving $450 million available for issuance under the authorization as of December 31, 2016.
Letters of Credit Facilities
We currently have letters of credit facilities available in addition to the portion of the Revolver available for issuance of letters of credit. Under these incremental letters of credit facilities, $120 million is available for the issuance of letters of credit, $60 million of which was utilized as of December 31, 2016 and $60 million of which remains available for use.
Liquidity
Based on our current and anticipated level of operations, we believe that our operating cash flows and cash on hand will be sufficient to meet our anticipated obligations for the next twelve months. To the extent that our operating cash flows are not sufficient to meet our liquidity needs, we may utilize amounts available under our financing arrangements, if necessary.

40


The following table summarizes our cash activity for the years ended December 31, 2016, 2015 and 2014:
 
For the Year Ended
 
December 31,
(in millions)
2016
 
2015
 
2014
Net cash provided by operating activities
$
939

 
$
991

 
$
1,022

Net cash used in investing activities
(189
)
 
(194
)
 
(185
)
Net cash provided by (used in) financing activities
130

 
(114
)
 
(747
)
NET CASH PROVIDED BY OPERATING ACTIVITIES
Net cash provided by operating activities decreased $52 million for the year ended December 31, 2016, as compared to the year ended December 31, 2015, primarily due to our $35 million multi-employer pension plan settlement payment.
Net cash provided by operating activities decreased $31 million for the year ended December 31, 2015, as compared to the year ended December 31, 2014, primarily due to unfavorable working capital comparisons to the prior year.
NET CASH USED IN INVESTING ACTIVITIES
2016
Cash used in investing activities for the year ended December 31, 2016 consisted primarily of purchases of property, plant and equipment of $180 million, the step acquisition of IEBM and EMA of $15 million and an additional investment in BA Sports Nutrition, LLC ("BA Sports") of $6 million, partially offset by cash received in the step acquisition of IEBM and EMA of $17 million.
2015
Cash used in investing activities for the year ended December 31, 2015, consisted primarily of purchases of property, plant and equipment of $179 million and investments in BA Sports and Bai Brands of $20 million and $15 million, respectively, partially offset by $20 million of proceeds from disposals of property, plant and equipment.
2014
Cash used in investing activities for the year ended December 31, 2014, consisted primarily of purchases of property, plant and equipment of $170 million and $19 million paid in connection with the acquisition of Davis Beverages Group, Inc. and Davis Bottling Co., Inc. (“Davis”).
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
2016
Net cash provided by financing activities for the year ended December 31, 2016 primarily consisted of proceeds from our issuances of senior unsecured notes, partially offset by stock repurchases of $519 million, dividend payments of $386 million, the repayment at maturity of our 2.90% Notes due 2016 of $500 million, and our partial redemption of our 6.82% Senior Notes due 2018, which included $360 million for principal repayments and $31 million related to the redemption premium.
On September 16, 2016, we completed the issuance of $400 million aggregate principal amount of 2.55% Senior Notes due 2026.
On December 14, 2016, we issued an additional $1,550 million of senior unsecured notes consisting of $250 million aggregate principal amount of 2.53% Senior Notes due 2021, $500 million aggregate principal amount of 3.13% Senior Notes due 2023, $400 million aggregate principal amount of 3.43% Senior Notes due 2027, and $400 million aggregate principal amount of 4.42% Senior Notes due 2046.
2015
Net cash used in financing activities for the year ended December 31, 2015 primarily consisted of stock repurchases of $521 million and dividend payments of $355 million, largely offset by proceeds from our issuance of senior unsecured notes.

41


On November 9, 2015, we completed the issuance of two tranches of senior unsecured notes, consisting of $500 million aggregate principal amount of our 3.40% Senior Notes due November 15, 2025 and $250 million aggregate principal amount of our 4.50% Senior Notes due November 15, 2045.
2014
Net cash used in financing activities for the year ended December 31, 2014 primarily consisted of stock repurchases of $400 million and dividend payments of $317 million.
Debt Ratings
As of December 31, 2016, our debt ratings were as follows:
Rating Agency
Long-Term Debt Rating
Commercial Paper Rating
Outlook
Date of Last Change
Moody's
Baa1
P-2
Stable
May 18, 2011
S&P
BBB+
A-2
Stable
November 13, 2013
These debt and commercial paper ratings impact the interest we pay on our financing arrangements. A downgrade of one or both of our debt and commercial paper ratings could increase our interest expense and decrease the cash available to fund anticipated obligations.
Capital Expenditures
Capital expenditures were $180 million, $179 million and $170 million for the years ended December 31, 2016, 2015 and 2014, respectively. Capital expenditures for the year ended December 31, 2016 primarily related to machinery and equipment, our distribution fleet, and costs associated with a new manufacturing plant in Mexico.
Capital expenditures for the year ended December 31, 2015 primarily related to machinery and equipment including production improvements in our Mexico facilities, distribution fleet and buildings and improvements.
Capital expenditures for the year ended December 31, 2014 primarily related to machinery and equipment including production improvements in our Mexico facilities, our distribution fleet, IT investments and expansion and replacement of existing cold drink equipment.
In 2017, we expect to incur annual capital expenditures, net of proceeds from disposals, in an amount of approximately 3% of our net sales, which we expect to fund through cash provided by operating activities.
Cash and Cash Equivalents
As a result of the above items, cash and cash equivalents increased $876 million since December 31, 2015 to $1,787 million as of December 31, 2016, primarily driven by the issuance of senior unsecured notes in December 2016 and our net cash provided by operating activities, partially offset by increased distributions to our shareholders.
Our cash balances are used to fund acquisitions, working capital requirements, scheduled debt and interest payments, income tax obligations, repurchases of our common stock, dividend payments and capital expenditures. Cash generated by our foreign operations is generally repatriated to the U.S. periodically except when required to fund working capital requirements in those jurisdictions. Foreign cash balances were $51 million and $52 million as of December 31, 2016 and 2015, respectively. We accrue tax costs for repatriation, as applicable, as cash is generated in those foreign jurisdictions.
Acquisitions and Investments
We have shown a disciplined approach to strategic investments in certain allied brands to enhance our position in premium and high growth categories and strengthen our existing distribution partnerships. During the year ended December 31, 2015, we acquired a minor equity interest in Bai Brands for $15 million. On November 21, 2016, we entered into the Merger Agreement with Bai Brands whereby we agreed to acquire the remaining equity interests in Bai Brands for an aggregate purchase price of $1.7 billion, subject to certain adjustments in the Merger Agreement. On January 31, 2017, we completed the Bai Brands Merger. Refer to Notes 3 and 24 of the Notes to our Audited Consolidated Financial Statements for additional information on the Bai Brands Merger.

42


During the year ended December 31, 2015, the Company acquired an 11.7% equity interest in BA Sports Nutrition, LLC for $20 million. During the year ended December 31, 2016, we acquired an additional interest of 3.8% in BA Sports Nutrition, LLC for $6 million, which increased our total ownership interest to 15.5%.
We have also made acquisitions to strengthen our route to market and support efforts to build and enhance our leading brands. On September 13, 2016, we agreed to purchase all of the outstanding shares of IEBM and EMA, previously 50:50 joint ventures between one of our subsidiaries and Acqua Minerale San Benedetto S.P.A. ("San Benedetto"). We paid approximately $15 million in cash for all of the outstanding shares of IEBM and EMA owned by San Benedetto.
On October 31, 2014, we acquired certain assets and liabilities of Davis in exchange for $19 million in cash and a $2 million holdback liability to satisfy any working capital adjustments and applicable indemnification claims, pursuant to the terms of the purchase agreement. During the year ended December 31, 2015, we paid out $1 million of the holdback liability.
We may continue to make future equity investments in allied brands and/or acquisitions of regional bottling companies, distributors and/or distribution rights to further extend our geographic coverage. Any acquisitions may require additional funding for future capital expenditures and possibly restructuring expenses.
Total Shareholder Distributions
Our Board declared aggregate dividends per share during the years ended December 31, 2016, 2015 and 2014 of $2.12, $1.92 and $1.64, respectively, and we continued common stock repurchases based upon authorizations from our Board. The following chart details these payments during the years ended December 31, 2016, 2015 and 2014.
totalsharedistribution2016.jpg
We increased our shareholder distributions 3% and 22%, respectively, for the years ended December 31, 2016 and 2015.
Refer to Part II, Item 5 "Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities" of this Annual Report on Form 10-K for additional information regarding these repurchases.


43


Contractual Commitments and Obligations
We enter into various contractual obligations that impact, or could impact, our liquidity. Based on our current and anticipated level of operations, we believe that our proceeds from operating cash flows and cash on hand will be sufficient to meet our anticipated obligations. To the extent that our operating cash flows and cash on hand are not sufficient to meet our liquidity needs, we may utilize amounts available under our financing arrangements, if necessary. Refer to Note 9 of the Notes to our Audited Consolidated Financial Statements for additional information regarding the senior unsecured notes payments described in this table.
The following table summarizes our contractual obligations and contingencies as of December 31, 2016:
 
 
 
Payments Due in Year
(in millions)
Total
 
2017
 
2018
 
2019
 
2020
 
2021
 
After 2021
Senior unsecured notes(1)
$
4,314

 
$

 
$
364

 
$
250

 
$
250

 
$
500

 
$
2,950

Bai Brands Merger consideration(2)
1,651

 
1,555

 
86

 

 
10

 

 

Capital leases(3)
191

 
20

 
20

 
19

 
18

 
17

 
97

Operating leases(4)
245

 
40

 
33

 
30

 
25

 
23

 
94

Purchase obligations(5)
1,045

 
663

 
170

 
111

 
68

 
9

 
24

Interest payments(6)
1,914

 
148

 
143

 
132

 
127

 
126

 
1,238

Payable to Mondelēz International, Inc.
26

 
5

 
5

 
16

 

 

 

Total
$
9,386

 
$
2,431

 
$
821

 
$
558

 
$
498

 
$
675

 
$
4,403

____________________________
(1)
Amounts represent payment for the senior unsecured notes issued by us. Please refer to Note 9 of the Notes to our Audited Consolidated Financial Statements for further information.
(2)
Amount represents consideration for the Bai Brands Merger, which was primarily paid on January 31, 2017. Please refer to Note 3 and Note 24 of the Notes to our Audited Consolidated Financial Statements for further information.
(3)
Amounts represent our contractual payment obligations for our lease arrangements classified as capital leases. These amounts exclude renewal options not yet executed but were included in the lease term to determine the capital lease obligation as the lease imposes a penalty on us in such amount that the renewal appeared reasonably assured at lease inception.
(4)
Amounts represent minimum rental commitments under non-cancelable operating leases.
(5)
Amounts represent payments under agreements to purchase goods or services that are legally binding and that specify all significant terms, including capital obligations and long-term contractual obligations. Long-term contractual obligations include, but are not limited to, commodity commitments and marketing commitments including sponsorships. Amounts exclude any gain or loss upon settlement of commodity derivative instruments. Refer to Note 10 of the Notes to our Audited Consolidated Financial Statements for further information.
(6)
Amounts represent our estimated interest payments based on specified interest rates for fixed rate debt and the impact of interest rate swaps that effectively convert fixed interest rates to variable interest rates. Amounts exclude any gain or loss upon settlement of related interest rate swaps. Refer to Note 10 of the Notes to our Audited Consolidated Financial Statements for further information.
Amounts excluded from our table
As of December 31, 2016, we had $19 million of non-current unrecognized tax benefits, related interest and penalties classified as a long-term liability. The table above does not reflect any payments related to these amounts as it is not possible to make a reasonable estimate of the amount or timing of the payment. Refer to Note 12 of the Notes to our Audited Consolidated Financial Statements for further information.

44


The total accrued benefit liability representing the underfunded position for pension and other postretirement benefit plans recognized as of December 31, 2016 was approximately $39 million. This amount is impacted by, among other items, funding levels, plan amendments, changes in plan assumptions and the investment return on plan assets. We did not include estimated payments related to our total accrued benefit liability in the table above.
The Pension Protection Act of 2006 was enacted in August 2006 and established, among other things, new standards for funding of U.S. defined benefit pension plans. We generally expect to fund all future contributions with cash flows from operating activities. Our international pension plans are generally funded in accordance with local laws and income tax regulations. We did not include our estimated contributions to our various single employer plans in the table above.
Refer to Note 13 of the Notes to our Audited Consolidated Financial Statements for further information regarding our single employer plans discussed above.
We have a deferred compensation plan where the assets are maintained in a rabbi trust and the corresponding liability related to the plan is recorded in other non-current liabilities. We did not include estimated payments related to the deferred compensation liability as the timing and payment of these amounts are determined by the participants and outside our control. Refer to Note 2 of the Notes to our Audited Consolidated Financial Statements for further information.
In general, we are covered under conventional insurance programs with high deductibles or are self-insured for large portions of many different types of claims. Our accrued liabilities for our losses related to these programs is estimated through actuarial procedures of the insurance industry and by using industry assumptions, adjusted for our specific expectations based on our claim history. As of December 31, 2016, our accrued liabilities for our losses related to these programs totaled approximately $103 million. Refer to Notes 8 and 11 of the Notes to our Audited Consolidated Financial Statements for further information. We did not include estimated payments related to our insurance liability in the table above.
OFF-BALANCE SHEET ARRANGEMENTS
We currently participate in three multi-employer pension plans. In the event that we withdraw from participation in one of these plans, the plan will ultimately assess us a withdrawal liability for exiting the plan, and U.S. GAAP would require us to record the withdrawal charge as an expense in our consolidated statements of income and as a liability on our consolidated balance sheets once the multi-employer pension withdrawal charge is probable and estimable. There are no other off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our results of operations, financial condition, liquidity, capital expenditures or capital resources other than letters of credit outstanding.
Refer to Note 9 of the Notes to our Audited Consolidated Financial Statements for additional information regarding outstanding letters of credit.
CRITICAL ACCOUNTING ESTIMATES
The process of preparing our consolidated financial statements in conformity with U.S. GAAP requires the use of estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses. Critical accounting estimates are both fundamental to the portrayal of a company’s financial condition and results and require difficult, subjective or complex estimates and assessments. These estimates and judgments are based on historical experience, future expectations and other factors and assumptions we believe to be reasonable under the circumstances. The most significant estimates and judgments are reviewed on an ongoing basis and revised when necessary. We have not made any material changes in the accounting methodology we use to assess or measure our critical accounting estimates. We have identified the items described below as our critical accounting estimates. We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use in our critical accounting estimates. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to gains or losses that could be material to our consolidated financial statements. See Note 2 of the Notes to our Audited Consolidated Financial Statements for a discussion of these and other accounting policies.

45


Description
 
Judgments and Uncertainties
 
Effect if Actual Results Differ from Assumptions
Goodwill and Other Indefinite Lived Intangible Assets
 
 
 
 
 
 
 
 
 
 
For goodwill and other indefinite lived intangible assets, we conduct tests for impairment annually, as of October 1, or more frequently if events or circumstances indicate the carrying amount may not be recoverable. We use present value and other valuation techniques to make this assessment. If the carrying amount of goodwill or an intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. For purposes of impairment testing we assign goodwill to the reporting unit that benefits from the synergies arising from each business combination and also assign indefinite lived intangible assets to our reporting units. We define reporting units as Beverage Concentrates, Latin America Beverages, and Packaged Beverages' two reporting units, DSD and WD.

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

Critical assumptions include revenue growth and profit performance, as well as an appropriate discount rate. Discount rates are based on a weighted average cost of equity and cost of debt, adjusted with various risk premiums. For 2016, such discount rates ranged from 5.00% to 10.25%.
 
The carrying values of goodwill and indefinite lived intangible assets as of December 31, 2016, were $2,993 million and $2,656 million, respectively.

We have not identified any impairments in goodwill or other indefinite lived intangible assets during the year.

The effect of a 1% increase in the discount rate used to determine the fair value of the reporting units as of October 1, 2016 would not change our conclusion, as the fair value of the reporting units would still exceed the carrying value for all of our goodwill by at least 100%.

The effect of a 1% increase in the discount rate used to determine the fair value of our brands as of October 1, 2016 would reduce the fair value of our brands but would not change our conclusion. The result of this effect would impact the amount of headroom over the carrying value of our brands as follows (in millions):

 
 
 
 
Fair Value
 
Carrying Value
 
 
Headroom Percentage
 
Result
 
+ 1%
 
Result
 
+ 1%
 
 
0 - 50%
 
$—

 
$—

 
$—

 
$—

 
 
51 - 100%
 

 
362

 

 
191

 
 
>100%
 
17,745

 
14,441

 
2,622

 
2,431

 
 
 
 
$
17,745

 
$
14,803

 
$
2,622

 
$
2,622

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue Recognition
 
 
 
 
 
 
 
 
 
 
 
 
We recognize revenue, net of the costs of our customer incentives, at the time risk of loss has been transferred to our customer.

Accruals for customer incentives and marketing programs are established for the expected payout based on contractual terms, volume-based metrics and/or historical trends.
 
Our customer incentives and marketing accrual methodology contains uncertainties because it requires management to make assumptions and to apply judgment to estimate our customer participation and volume performance levels which impact the expense recognition. Our estimate of the amount and timing of customer participation and volume performance levels is based primarily on a combination of known or historical transaction experience and forecasted volumes. Differences between estimated expenses and actual costs are normally insignificant and are recognized to earnings in the period differences are determined.

Further judgment is required to ensure the classification of the spend is correctly recorded as either a reduction from gross sales or advertising and marketing expense.
 
A 10% change in the accrual for our customer incentives and marketing programs as of December 31, 2016, would have affected our net sales and SG&A expenses by $25 million and $3 million for the year ended December 31, 2016.
 
 
 
 
 

46


Description
 
Judgments and Uncertainties
 
Effect if Actual Results Differ from Assumptions
Pension Benefits
 
 
 
 
 
 
 
 
 
 
We have several pension plans covering employees who satisfy age and length of service requirements. Depending on the plan, pension benefits are based on a combination of factors, which may include salary, age and years of service.

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

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

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

Refer to Note 13 of the Notes to our Audited Consolidated Financial Statements for further information about the key assumptions.
 
The effect of a 1% increase or decrease in the weighted-average discount rate used to determine the pension benefit obligations for U.S. plans would change the benefit obligation as of December 31, 2016 by approximately a $24 million decrease and a $29 million increase, respectively.
The effect of a 1% increase or decrease in the weighted-average discount rate used to determine the net periodic pension costs would change the costs for the year ended December 31, 2016 by approximately a $2 million decrease and a $3 million increase, respectively.
 The effect of a 1% increase or decrease in the expected return on plan assets used to determine the net periodic pension costs would change the costs for the year ended December 31, 2016 by approximately $2 million.
 
 
 
 
 
 
 
 
 
 
 
 
 
Risk Management Programs
 
 
 
 
 
 
 
 
 
 
We retain selected levels of property, casualty, workers' compensation, health and other business risks. Many of these risks are covered under conventional insurance programs with high deductibles or self-insured retentions.
 
We believe the use of actuarial methods to estimate our future losses provides a consistent and effective way to measure our self-insured liabilities. However, the estimation of our liability is judgmental and uncertain given the nature of claims involved and length of time until their ultimate cost is known.

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

A 10% change in our accrued liabilities related to the retained risks, net of associated receivables, as of December 31, 2016 would have affected income from operations by approximately $9 million for the year ended December 31, 2016.
 
 
 
 
 
 
 
 
 
 
 
 
 
Income Taxes
 
 
 
 
 
 
 
 
 
 
We establish income tax liabilities to remove some or all of the income tax benefit of any of our income tax positions based upon one of the following: (1) the tax position is not “more likely than not” to be sustained, (2) the tax position is “more likely than not” to be sustained, but for a lesser amount, or (3) the tax position is “more likely than not” to be sustained , but not in the financial period in which the tax position was originally taken.

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

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

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

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

47


EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
Financial Accounting Standards Board issued Accounting Standards Update ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share Based Payment Accounting ("ASU 2016-09") which we will adopt as of January 1, 2017. We estimate the adoption of the standard will result in incremental income tax benefit of $14 million for the year ended December 31, 2017. Fluctuations in the our stock price and changes in expected option holder activity may increase or decrease our estimated income tax benefit. Refer to Note 2 of the Notes to our Audited Consolidated Financial Statements for a discussion of recently issued accounting standards and recently adopted provisions of U.S. GAAP, including the provisions of ASU 2016-09.
ITEM 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, investment or trading.
Foreign Exchange Risk
The majority of our net sales, expenses and capital purchases are transacted in U.S. dollars. However, we have 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, 2016, 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 $22 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, 2016, we had derivative contracts outstanding with a notional value of $7 million maturing at various dates through April 13, 2017.
Interest Rate Risk
We centrally manage our debt portfolio through the use of interest rate swaps and monitor our mix of fixed-rate and variable rate debt. As of December 31, 2016, the carrying value of our fixed-rate debt, excluding capital leases, was $4,325 million, $1,120 million of which has been swapped to floating rates and exposed to variability in interest rates.
The following table is an estimate of the impact to the interest rate swaps that could result from hypothetical interest rate changes during the term of the financial instruments, based on debt levels as of December 31, 2016:
Sensitivity Analysis
Hypothetical Change in Interest Rates
 
Annual Impact to Interest Expense
 
Change in Fair Value (2)
1-percent decrease(1)
 
$10 million decrease
 
$70 million increase
1-percent increase
 
$11 million increase
 
$64 million decrease
____________________________
(1)
We pay an average floating rate, which fluctuates periodically, based on LIBOR and a credit spread, as a result of interest rate swaps on certain debt instruments. See Note 10 of the Notes to our Audited Consolidated Financial Statements for further information. As we would not expect LIBOR to fall below zero, we calculated the hypothetical change in the interest rate to zero.
(2)
See Note 2 and Note 10 of the Notes to our Audited Consolidated Financial Statements for additional information on classification and quantification of these derivative positions.

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Commodity Risks
We are subject to market risks with respect to commodities because our ability to recover increased costs through higher pricing may