Dr Pepper Snapple Group, Inc. (DPS-OLD)

FORM 10-K | Annual Report
Dr Pepper Snapple Group, Inc. (Form: 10-K, Received: 02/14/2018 08:12:20)
 
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, 2017
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
DPSGIGROUPINCA29.JPGClick to enlarge
(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

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes  o     No  x
 
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.   x      

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of "large accelerated filer", "accelerated filer", "smaller reporting company", and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer  x
Accelerated Filer  o
Non-Accelerated Filer  o
Smaller Reporting Company  o
Emerging Growth Company  o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.     o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act ).  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, 2017 , the last business day of the registrant's most recently completed second fiscal quarter, was $16,544,425,098 (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 8, 2018 , there were 179,744,078  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 or on an amendment on Form 10-K/A are incorporated by reference in Part III.
 



DR PEPPER SNAPPLE GROUP, INC.
FORM 10-K
For the Year Ended December 31, 2017

 
 
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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EXPLANATORY NOTE

On January 29, 2018, Dr. Pepper Snapple Group, Inc. (“DPS”) entered into an Agreement and Plan of Merger (the “Merger Agreement”) by and among DPS, Maple Parent Holdings Corp. (“Maple Parent”) and Salt Merger Sub, Inc. (“Merger Sub”), whereby Merger Sub will be merged with and into Maple Parent, the owner of Keurig Green Mountain, Inc. (“Keurig”), a leader in specialty coffee and innovative single serve brewing systems, with Maple Parent surviving the merger as a wholly-owned subsidiary of DPS and the holders of the equity interests of Maple Parent will receive newly-issued shares of DPS common stock (the “Acquisition Shares”) constituting approximately 87% of our outstanding common stock, on a fully diluted basis following the closing (the “Transaction”). The completion of the Transaction requires the approval by the holders of DPS’ common stock of (i) an amendment to the DPS certificate of incorporation to increase the number of authorized shares of common stock and to change DPS’ name to “Keurig Dr Pepper Inc.” and (ii) the issuance of the Acquisition Shares pursuant to the Merger Agreement (collectively, the “Stockholder Approvals”). DPS expects to seek the Stockholder Approvals at a meeting of stockholders to be scheduled. DPS will prepare, file and mail a definitive proxy statement relating to such meeting. The definitive proxy statement will contain a more detailed description of the Merger Agreement and the Transaction.

Please see “Item 1 - Business - Proposed Keurig Transaction” for further information.

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, including for KDP (formerly DPS) following the closing of the Transaction. 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:
stockholders may not approve the Stockholder Approvals;
regulatory and required approvals in connection with the Transaction may not be obtained on the proposed terms or on the anticipated schedule;
conditions of the Transaction may not be satisfied or waived;
legal proceedings or governmental inquiries in connection with the Transaction could delay or prevent the completion of the Transaction;
DPS stockholders will have a minority ownership and voting interest after the Transaction and exercise less influence;
the composition of the DPS Board of Directors (our "Board") will change following the Transaction;
the Company will be a "controlled company" following the Transaction and will rely on exemptions from certain corporate governance requirements, including having fewer independent directors on its board of directors or board committees following the Transaction;
the Merger Agreement may be terminated in accordance with its terms and the Transaction may not be consummated;
failure to consummate the Transaction could negatively impact DPS and its future operations;
business uncertainties and certain operating restrictions will exist for both DPS and Keurig until consummation of the Transaction;
restrictions on DPS' ability to pursue other alternatives to the Transaction;
DPS stockholders' investment could be materially and adversely affected if the due diligence of Keurig was inadequate or if unexpected risks related to Keurig materialize;
expected combination benefits from the Transaction may not be fully-realized;
integration of the combined businesses of DPS and Keurig may not be successful or may be more challenging than anticipated;
the diversion of management's attention to the completion of the Transaction and the integration of the DPS and Keurig businesses may reduce management's ability to devote sufficient time to the Company's business and operations prior to and after the Transaction;
the announcement of the Transaction may lead to the departure of key personnel;

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downgrade of DPS' credit rating below investment grade could occur;
Maple Parent and DPS will incur direct and indirect costs as a result of the Transaction;
restrictions on DPS from indebtedness agreements in connection with the Transaction may affect business operations;
additional risks associated with the coffee and appliance business and operations in new geographical regions;
changes in consumer preferences, trends and health concerns;
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;
dependence on third party bottling and distribution companies;
maintaining our relationships with our large retail customers;
operating in highly competitive markets and our ability to compete with companies with significant financial resources;
future impairment of our goodwill and other intangible assets;
the need to service our debt;
fluctuations in foreign currency exchange rates;
disruptions to our information systems and third-party service providers;
increases in the cost of employee benefits;
recession, financial and credit market disruptions and other economic conditions;
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, natural disasters, 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 Current DPS Business" and elsewhere in this Annual Report on Form 10-K.

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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 the Caribbean, 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)
$6.7 billion of net sales in 2017 from the U.S. (90%), Mexico and the Caribbean (7%) and Canada (3%)
_____________________________________________________
(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.
PROPOSED KEURIG TRANSACTION

On January 29, 2018, DPS entered into the Merger Agreement by and among DPS, Maple Parent and Merger Sub, whereby Merger Sub will be merged with and into Maple Parent, with Maple Parent surviving the merger as a wholly-owned subsidiary of the Company. For financial reporting and accounting purposes, Maple Parent will be the acquirer of DPS upon completion of the Transaction.

Maple Parent owns Keurig, a leader in specialty coffee and innovative single serve brewing systems. The combined businesses will create Keurig Dr Pepper Inc. ("KDP"), a new beverage company of scale with a portfolio of iconic consumer brands and expanded distribution capability to reach virtually every point-of-sale in North America.

In consideration for the Transaction, each share of common stock of Maple Parent issued and outstanding immediately prior to the closing of the Transaction (the “Effective Time”) shall be converted into the Acquisition Shares.  As a result, upon completion of the Transaction, the former stockholders of Maple Parent will own approximately 87% of our common stock and our continuing stockholders will own approximately 13% on a fully diluted basis.

The Merger Agreement provides that DPS will declare a special cash dividend equal to $103.75 per share, subject to any withholding of taxes required by law, payable to holders of its common stock as of the business day immediately prior to the completion of the Transaction.

The completion of the Transaction is subject to, among other things, the Stockholder Approvals.

See Note 20 of the Notes to our Audited Consolidated Financial Statements for further information related to the Transaction.


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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 2017 . The following charts provide various details regarding sources of our total 288 fluid ounce cases in 2017 :
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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. SU108031771064FAMSHOT10INCH.JPGClick to enlarge


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The highlights about our priority brands as of December 31, 2017 are as follows:
DRPEPPER2015A30.JPGClick to enlarge
  #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
      CANADADRY2015A19.JPGClick to enlarge
#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
 
 
         A7UP2015A25.JPGClick to enlarge
#2 lemon-lime CSD in the U.S.
Flavors include regular, diet, cherry and 7UP TEN
The original "Un-Cola," created in 1929
 
 
    AWROOTBEER2015A20.JPGClick to enlarge
#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
 
 
        PENAFIELITEM1A01A01A25.JPGClick to enlarge               
#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
 
 
   SQUIRT2015A25.JPGClick to enlarge
#1 grapefruit CSD in the U.S. and a leading grapefruit CSD in Mexico
Founded in 1938
 
 
 
 
     SCHWEPPES2015A19.JPGClick to enlarge
#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
 
 
     SNAPPLE2015A27.JPGClick to enlarge
#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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PICTURE1.JPGClick to enlarge
#4 enhanced water brand in the U.S. and one of the fastest-growing LRB brands in the U.S.
Bai, Bai Cocofusion and Bai Bubbles lines offer fresh fruit flavor and antioxidants.
Bai Supertea is an antioxidant-infused real brewed tea.
Created in 2008
MOTTS2015A26.JPGClick to enlarge
#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
   CLAMATO2015A29.JPGClick to enlarge
A leading spicy tomato juice brand in the U.S., Canada and Mexico that ranks as the #1 shelf stable vegetable juice brand in the U.S.
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, Camarón, Vuelve a la Vida, Cubano 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 2017 .
All logos in the table above are registered trademarks of DPS or its subsidiaries.
In the CSD market in the U.S. and Canada, we participate primarily in the flavored CSD category. Our significant brands are Dr Pepper, Canada Dry, 7UP, Crush, A&W, Sunkist soda, Schweppes, Squirt and RC Cola. We also sell regional and smaller niche brands, such as Vernors. 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 ha d a 21.7% s hare of the U.S. CSD market in 2017 (measured by retail sales), an increase of 0.5% over 2016 . 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 enhanced and flavored water, and mixer categories. Our significant NCB brands are Snapple, Hawaiian Punch, Mott's, Clamato and Bai. We also sell regional and smaller niche brands, such as Nantucket Nectars. 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 significant 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 2017 , 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 th e # 1 fla vored CSD company in the U.S. Our largest brand, Dr Pepper, is the  #2 f lavored CSD in the U.S. and our Snapple brand is a leading ready-to-drink t ea. Overall, in 2017 , 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.

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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 WalMart Store s, Inc. ("Walmart"), The Kroger Co., Albertson Companies LLC, Target Corporation and Publix Super Markets, Inc., some of the largest food service customers, including McDonald's Corporation, Restaurant Brands International Inc., Yum! Brands, Inc., 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 conve nience store customers, including 7-Eleven, Inc., OXXO and Circle K Enterprises, Inc. Our portfolio of strong brands, operational scale and experience across beverage segments has enabled us to maintain strong relationships with our customers.
Attractive positioning within a large and profitable market.    We hold the  #1 position in the U.S. flavored CSD beverage markets by 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 enhanced and flavored water.
Broad geographic manufacturing and distribution coverage.    As of December 31, 2017 , we had 18 manufacturing facilities and 98 principal distribution centers and warehouse facilities in the U.S., as well as four manufacturing facilities and 21 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 6,100 and 1,700 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. These allied brand partnerships allow us to rapidly participate in growth in emerging and fast growing categories where we do not currently have a brand presence. We typically make a minimal investment in each allied brand company in order to obtain a return for our distribution efforts.
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 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.

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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.
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, 2017 , our operating structure consists of three reporting segments: Beverage Concentrates, Packaged Beverages and Latin America Beverages. Segment financial data for 2017 , 2016 and 2015 , including financial information about foreign and domestic operations, is included in Note 18 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 2017 , our Beverage Concentrates segment had net sales of approximately $1,332 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.
 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.
The PepsiCo affiliated and Coca-Cola affiliated bottler systems represent a small number of customers where the loss of any one or more of those customers would have a material adverse effect on the Beverage Concentrates segment.
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 2017 , our Packaged Beverages segment had net sales of approximately $4,871 million . Key NCB brands in this segment include Snapple, Hawaiian Punch, Mott's, FIJI mineral water, Clamato, Bai, Yoo-Hoo, Deja Blue, ReaLemon, AriZona tea, Vita Coco coconut water, BODYARMOR, Mr and Mrs T mixers, 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 82% of our 2017 Packaged Beverages net sales of branded products come from our own brands and our contract manufacturing. Contract manufacturing refers to the bottling of beverages for private label owners or others. The remaining portion of our 2017 Packaged Beverages net sales come from the distribution of third party brands such as FIJI mineral water, Big Red, BODYARMOR, Vita Coco coconut water, AriZona tea, CORE Hydration, Neuro drinks, Sunny Delight, High Brew, Hydrive energy drinks and Sparkling Fruit 2 O. 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, PET bottles and caps, glass bottles and closures, 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 2017 , 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 2017 , our Latin America Beverages segment had net sales of $487 million , with our operations in Mexico representing approximately 90% of the net sales of this segment. Key brands in this segment 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 2017 , Walmart, the largest customer of our Latin America Beverages segment, accounted for approximately 12% of our net sales in this segment. Walmart and OXXO represent a small number of customers where the loss of one of those customers would have a material adverse effect on the Latin America Beverages 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 2017 :
CHART-9FCFCA0421BB59F5A95.JPGClick to enlarge
Agreements with PepsiCo and Coca-Cola
In 2010, we completed the licensing of certain brands to PepsiCo and Coca-Cola. The agreements have an initial period of 20 years with automatic 20-year renewal periods and require PepsiCo, Coca-Cola and certain Coca-Cola affiliated bottlers to meet certain performance conditions.

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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 an d 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 2017 , our largest retailer was Walmart, representing approximately 13% 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.
CHART-B63F166F0F32592B8BEA01.JPGClick to enlarge
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.
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.

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Our Trademarks.    We own numerous trademarks in our portfolio within the U.S., Canada, Mexico and other countries. As of December 31, 2017 , brands we own through various subsidiaries in various jurisdictions include, but are not limited to, Dr Pepper, Canada Dry, Peñafiel, Squirt, 7UP, Crush, A&W, Schweppes, RC Cola, Sun Drop, Venom, Snapple, Hawaiian Punch, Mott's, Bai, 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. Depending upon the jurisdiction, trademarks are valid as long as they are in use and/or their registrations are properly maintained. 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 a few cases without payment to us. As of December 31, 2017 , our Allied Brand portfolio included, but was not limited to, the following brands:
ALLIEDBRANDSV2.JPGClick to enlarge
Intellectual Property We License to Others.    We license some of our intellectual property, including trademarks, to others, which enhances brand awareness. 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. We also have intellectual property related to licensing arrangements for certain brands, primarily Dr Pepper, with Coca-Cola affiliated and PepsiCo affiliated bottler systems and distribution routes.
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, 2017 , we operated 22 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 2017 , 92% of our manufactured volumes came from our brands and 8% 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, PET bottles and caps, glass bottles and closures, 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.
COSTOFSALESCOMPOSITIONA01.JPGClick to enlarge
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.
EMPLOYEES
As of December 31, 2017 , we employed approximately 21,000  employees.
In the U.S., we have approximately 17,000  full-time employees. We have union collective bargaining agreements covering approximately 4,500  full-time employees. Several agreements cover multiple locations. These agreements address working conditions as well as wage rates and benefits. In Mexico, we employ approximately 4,000  full-time employees, with approximately 3,000 employees party to collective bargaining agreements. We do not have a significant number of employees in Canada, the Caribbean or overseas.
We believe we have good relations with our employees.

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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.
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 2017 . 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
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.  
RISKS RELATED TO THE PROPOSED TRANSACTION WITH KEURIG

Our stockholders may not approve the Transaction.

The completion of the Transaction requires the Stockholder Approvals and we can provide no assurance that all required approvals will be obtained.

The regulatory approvals and any other required approvals in connection with the Transaction may not be obtained on the proposed terms or on the anticipated schedule.

The completion of the Transaction will depend upon a number of conditions being satisfied, including, among others, obtaining all regulatory approvals required to complete the Transaction, including the expiration or early termination of the waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act") and any required foreign regulatory approvals, and the absence of any injunction prohibiting the Transaction and absence of any legal requirements enacted by a court or other governmental entity since the date of the Merger Agreement that remain in effect prohibiting consummation of the Transaction. We can provide no assurance that all required approvals will be obtained on the anticipated schedule, or at all.

The waiting period with respect to the notifications filed under the HSR Act expires 30 calendar days after such filings, unless otherwise extended or terminated. The Federal Trade Commission ("FTC") or Department of Justice ("DOJ") may effectively extend the statutory waiting period by requesting additional information regarding the Transaction and its potential effects on competition. Also, at any time before or after completion of the Transaction, the FTC or the DOJ could act under the antitrust laws to prevent a substantial lessening of competition or the creation of a monopoly, including by seeking to enjoin completion of the Transaction or seeking divestiture of our or Keurig’s assets, businesses or product lines.

The annual meeting of our stockholders at which the Stockholder Approvals will be considered may take place before all of the required regulatory approvals have been obtained and before all conditions to such approvals, if any, are known. In this event, if the Stockholder Approvals are obtained, we and Maple Parent may subsequently agree to conditions without further seeking stockholder approval, even if such conditions could have an adverse effect on us, Maple Parent or the combined company, except as required by applicable law.

The closing of the Transaction is subject to many other conditions and if these conditions are not satisfied or waived, the Transaction will not be completed.

In addition to regulatory and other required approvals, the closing of the Transaction is subject to a number of conditions as set forth in the Merger Agreement that must be satisfied or waived, including the authorization of the listing on the NYSE of the Acquisition Shares and, with respect to DPS’s obligation to close, the securing of debt financing for the Transaction.

The closing of the Transaction is also dependent on the accuracy of representations and warranties made by the parties to the Merger Agreement (subject to customary materiality qualifiers and other customary exceptions), the performance in all material respects by the parties of obligations imposed under the Merger Agreement, the absence of a material adverse effect on Maple Parent or us, the receipt of officer certificates by the other party certifying the satisfaction of the preceding conditions, receipt by Maple Parent of the tax opinion from McDermott Will & Emery LLP as to the tax treatment of the Transaction, and receipt by us of the solvency opinion from our solvency advisor. In addition, it is a condition to our obligation to close under the Merger Agreement that the total indebtedness (other than relating to capital leases) of KDP (formerly DPS), after giving effect to the Transaction and the financings related thereto, does not exceed $16.9 billion in the aggregate. There can be no assurance as to whether or when the conditions to the closing of the Transaction will be satisfied or waived or as to whether or when the Transaction will be consummated.

Any legal proceedings or governmental inquiries in connection with the Transaction, the outcomes of which are uncertain, could delay or prevent the completion of the Transaction.

In connection with the Transaction, plaintiffs may file lawsuits against DPS, Maple Parent and/or the directors and officers of either company. In addition, either company may face inquiries from governmental entities in connection with the Transaction. Although we believe any such lawsuits would be meritless, the outcome of such litigation or governmental inquiry is uncertain. Such legal proceedings or governmental inquiries could also prevent or delay the completion of the Transaction and result in additional costs to us.


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DPS stockholders will have a reduced ownership and voting interest after the Transaction and will exercise less influence over management. DPS stockholders currently have the right to vote in the election of the DPS Board and on other matters affecting DPS.

Upon the consummation of the Transaction, each DPS stockholder will remain a stockholder of DPS with a percentage ownership of KDP following the Transaction that is smaller than the stockholder’s prior percentage ownership of DPS. It is currently expected that the former stockholders of DPS as a group immediately after the Transaction will own approximately 13% of the outstanding shares of common stock of KDP, on a fully diluted basis. Because of this, DPS stockholders will have less influence on the management and policies of KDP than they now have on the management and policies of DPS.

Also see “- KDP will meet the requirements to be a “controlled company” within the meaning of the rules of the NYSE and, as a result, will qualify for, and intends to rely on, exemptions from certain corporate governance standards, which limit the presence of independent directors on its board of directors or board committees.

Following the Transaction, the composition of the KDP Board will be different than the composition of the current DPS Board.

Upon consummation of the Transaction, the composition of the KDP Board will be different than the current DPS Board. The DPS Board currently consists of 9 directors. Upon the consummation of the Transaction, the KDP Board will consist of 12 members:

eight directors will be appointed by Maple Parent's stockholders, including Keurig's current Chief Executive Officer;
two directors will be appointed by DPS, including our current President and Chief Executive Officer; and
two independent directors will be mutually agreed upon by Maple Parent and DPS.

This new composition of the board of directors of KDP may affect the future decisions of KDP.

KDP will meet the requirements to be a “controlled company” within the meaning of the rules of the NYSE and, as a result, will qualify for, and intends to rely on, exemptions from certain corporate governance standards, which limit the presence of independent directors on its board of directors or board committees.

Following the Transaction, approximately 87% of the outstanding common stock of KDP will be held by holders of the equity interests of Maple Parent, on a fully diluted basis, and approximately 13% will be held by the stockholders of DPS, on a fully diluted basis.

As a result, KDP will be a “controlled company” for purposes of Section 303A of the NYSE Listed Company Manual and will be exempt from certain governance requirements otherwise required by the NYSE. Under Section 303A, a company of which more than 50% of the voting power is held by an individual, a group or another company is a “controlled company” and is exempt from certain corporate governance requirements, including requirements that (1) a majority of the board of directors consist of independent directors, (2) compensation of officers be determined or recommended to the board of directors by a majority of its independent directors or by a compensation committee that is composed entirely of independent directors, and (3) director nominees be selected or recommended for selection by a majority of the independent directors or by a nominating/corporate governance committee composed solely of independent directors. Following the consummation of the Transaction, KDP will continue to have an audit committee that is composed entirely of independent directors.

As a result, the procedures for approving significant corporate decisions could be determined by directors who have a direct or indirect interest in such decisions and KDP’s stockholders will not have the same protections afforded to stockholders of other companies that are required to comply with the independence rules of the NYSE.

The Merger Agreement may be terminated in accordance with its terms and the Transaction may not be consummated. The Merger Agreement contains provisions that restrict the ability of the DPS Board to pursue alternatives to the Transaction and to change its recommendation that DPS stockholders vote for the Stockholder Approvals. In specified circumstances, DPS could be required to pay Maple Parent a termination fee of up to $700 million.
The Merger Agreement may be terminated at any time prior to the Effective Time, whether before or after receipt of the approval of DPS’ stockholders or the effectiveness of the Maple Parent stockholder consent or Merger Sub stockholder consent, by the mutual written consent of the parties, by either Maple Parent or DPS if stockholder or regulatory approvals are not obtained, or by Maple Parent or DPS in connection with certain breaches of the Merger Agreement by DPS or Maple Parent, respectively.

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If the Merger Agreement is terminated by DPS pursuant to accepting a superior acquisition proposal and entering into an alternative acquisition agreement, by Maple Parent if our Board changes its recommendation to stockholders to approve the issuance of the Acquisition Shares and amendment to the certificate of incorporation, or by either DPS or Maple Parent because the closing does not occur by October 29, 2018 and there is an acquisition proposal outstanding at the time of such termination and within twelve months of termination of the Merger Agreement DPS consummates or enters into an agreement with respect to an acquisition proposal, DPS shall pay to Maple Parent a termination fee in the amount of $700 million. If the Merger Agreement is terminated by DPS because Maple Parent is unable to obtain required financing on the terms required by the Merger Agreement, Maple Parent shall pay to DPS a reverse termination fee in the amount of $700 million.

Failure to consummate the Transaction could negatively impact DPS and its future operations.

If the Transaction is not consummated for any reason, DPS may be subjected to a number of material risks. The price of shares of DPS common stock may decline to the extent that its current market prices reflect a market assumption that the Transaction will be consummated. In addition, some costs related to the Transaction must be paid by DPS whether or not the Transaction is consummated. Furthermore, DPS may experience negative reactions from its stockholders, customers and employees in the event the Transaction is not consummated. Further, DPS' management would have committed time, financial and other resources to matters relating to the Transaction that could otherwise have been devoted to pursuing other beneficial opportunities for DPS.

In addition, if the Transaction is not completed, DPS could be subject to litigation related to any failure to complete the merger or related to any enforcement proceeding commenced against us to perform our obligations under the Merger Agreement. The materialization of any of these risks could materially and adversely impact our ongoing business.

DPS and Keurig will be subject to business uncertainties and certain operating restrictions until consummation of the Transaction.

Uncertainty about the effect of the Transaction on employees and customers may have an adverse effect on DPS, Keurig or KDP following the Transaction. These uncertainties could disrupt our business or the business of Keurig and cause customers, suppliers, vendors, partners and others that deal with us and Keurig to defer entering into contracts with us and Keurig or making other decisions concerning us and Keurig or seek to change or cancel existing business relationships with us and Keurig. Retention and motivation of certain employees may be challenging during the pendency of the Transaction due to uncertainty about their future roles and difficulty of integration. If key employees depart because of issues related to the uncertainty and difficulty of integration or a desire not to remain with KDP, KDP’s business following the Transaction could be negatively impacted. In addition, the Merger Agreement restricts DPS from making certain acquisitions and investments and imposes certain other restrictions on the conduct of each party's business until the Transaction occurs without the consent of Keurig. These restrictions may prevent us from pursuing attractive business opportunities that may arise prior to the completion of the Transaction.

The Merger Agreement contains restrictions on our ability to pursue other alternatives to the Transaction.

The Merger Agreement contains non-solicitation provisions that, subject to limited exceptions, restrict our ability to initiate, solicit, knowingly encourage, induce or assist any inquiries or the making, submission, announcement or consummation of, proposals or offers that constitutes or could reasonably be expected to lead to any acquisition proposal. Further, subject to limited exceptions, consistent with applicable law, the Merger Agreement provides that our board will not withhold, withdraw, qualify or modify (or publicly propose or resolve to withhold, withdraw, qualify or modify) in a manner adverse to Maple Parent its recommendation that our stockholders vote in favor of the Stockholder Approvals. Although our Board is permitted to take certain actions in response to a superior proposal or an intervening event if it determines that the failure to do so would be reasonably likely to be inconsistent with its fiduciary duties, doing so in specified situations could require us to pay to Maple Parent the Termination Fee.

Such provisions could discourage a potential acquiror that might have an interest in making a proposal from considering or proposing any such transaction, even if it were prepared to pay consideration with a higher value to our stockholders than that to be paid in the Transaction. There also is a risk that the requirement to pay the termination fee or expense payment to Maple Parent in certain circumstances may result in a potential acquiror proposing to pay a lower per share price to acquire us than it might otherwise have proposed to pay.

If our due diligence investigation of Keurig was inadequate or if unexpected risks related to Keurig's business materialize, it could have a material adverse effect on our stockholders' investment.

Even though we conducted a due diligence investigation of Keurig, we cannot be sure that our diligence surfaced all material issues that may be present inside Keurig or its business, or that it would be possible to uncover all material issues through a customary amount of due diligence, or that factors outside of Keurig and its business and outside of its control will not arise later. If any such material issues arise, they may materially and adversely impact the on-going business of KDP and our stockholders' investment.


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RISKS RELATED TO THE BUSINESS OF THE COMBINED COMPANY

Expected combination benefits from the Transaction may not be fully-realized or realized within the expected time frame.

The ability of Keurig and DPS to realize the anticipated benefits of the Transaction will depend, to a large extent, on KDP’s ability to combine Keurig’s and DPS' businesses in a manner that facilitates growth opportunities and realizes anticipated synergies, and achieves the projected stand-alone cost savings and revenue growth trends identified by each company. It is expected that KDP will benefit from operational and general and administrative cost synergies resulting from the warehouse and transportation integration, direct procurement savings on overlapping materials, purchasing scale on indirect spend categories and optimization of duplicate positions and processes. KDP may also enjoy revenue synergies, driven by a strong portfolio of brands with exposure to higher growth segments and the ability to leverage our collective distribution strength. In order to achieve these expected benefits, KDP must successfully combine the businesses of Keurig and DPS in a manner that permits these cost savings and synergies to be realized and must achieve the anticipated savings and synergies without adversely affecting current revenues and investments in future growth. If KDP experiences difficulties with the integration process or is not able to successfully achieve these objectives, the anticipated benefits of the Transaction may not be realized fully or at all or may take longer to realize than expected.

The businesses of DPS and Keurig may not be integrated successfully or such integration may be more difficult, time-consuming or costly than expected. Operating costs, customer loss and business disruption, including difficulties in maintaining relationships with employees, customers, clients or suppliers, may be greater than expected following the transaction. Revenues following the transaction may be lower than expected.

The combination of two independent businesses is a complex, costly and time-consuming process. As a result, Keurig and DPS will be required to devote significant management attention and resources to combining their business practices and operations. This process may disrupt the businesses. The failure to meet the challenges involved in combining the two businesses and to realize the anticipated benefits of the transactions could cause an interruption of, or a loss of momentum in, the activities of KDP and could adversely affect the results of operations of KDP. The overall combination of Keurig’s and DPS’ businesses may also result in material unanticipated problems, expenses, liabilities, competitive responses, loss of customer and other business relationships and diversion of management attention. The difficulties of combining the operations of the companies include, among others:

the diversion of management attention to integration matters;
difficulties in integrating operations and systems, including intellectual property and communications systems;
challenges in conforming standards, controls, procedures and accounting and other policies, business cultures and compensation structures between the two companies;
difficulties in assimilating employees and in attracting and retaining key personnel;
challenges in keeping existing customers and obtaining new customers;
difficulties in achieving anticipated synergies, business opportunities and growth prospects from the combination;
difficulties in managing the expanded operations of a significantly larger and more complex company;
the transition of management of the combined company from DPS' executive management team to Keurig's executive management team who has limited experience with operating a LRB business;
integrating the companies' financial reporting and internal control systems, including compliance by the combined company with Section 404 of the Sarbanes-Oxley Act of 2002, as amended, and the rules promulgated by the SEC;
the impact of the additional debt financing expected to be incurred in connection with the Transaction;
contingent liabilities that are larger than expected; and
potential unknown liabilities, adverse consequences and unforeseen increased expenses associated with the Transaction.

Many of these factors are outside of the control of Keurig and DPS and/or will be outside the control of KDP, and any one of them could result in increased costs, decreased expected revenues and diversion of management time and energy, which could materially impact the business, financial condition and results of operations of KDP. In addition, even if the operations of the businesses of Keurig and DPS are combined successfully, the full benefits of the Transaction may not be realized, including the synergies or sales or growth opportunities that are expected. These benefits may not be achieved within the anticipated time frame, or at all. Further, additional unanticipated costs may be incurred in combining the businesses of Keurig and DPS. All of these factors could cause dilution to the earnings per share of KDP, decrease or delay the expected accretive effect of the Transaction, and negatively impact the price of DPS common stock. As a result, it cannot be assured that the combination of Keurig and DPS will result in the realization of the full benefits anticipated from the Transaction within the anticipated time frames or at all.


15


If a credit rating downgrade below investment grade were to occur, DPS may be required to purchase its outstanding notes and may be unable to do so.

DPS has a substantial amount of debt outstanding, comprised of various series of outstanding notes. These notes generally require DPS to offer to repurchase all outstanding senior unsecured notes of each series at 101% of the principal amount thereof plus, without duplication, accrued and unpaid interest, if any, to the date of repurchase should DPS undergo a change of control and receive a credit rating downgrade below investment grade. Because the Transaction will constitute a change of control of DPS, if any such series is rated below investment grade by Moody’s Investors Service, Inc. ("Moody's") and Standard & Poor’s Financial Services LLC ("S&P") within the first 60 days following the effectiveness of the Transaction, DPS will be required to offer to repurchase all outstanding senior unsecured notes of each such series at 101% of the principal amount thereof plus, without duplication, accrued and unpaid interest, if any, to the date of repurchase. DPS may not have sufficient funds (including as a result of a failure to raise sufficient funds through the debt or equity markets) to finance a required repurchase of such senior unsecured notes by DPS. The failure to finance or complete such an offer would place DPS in default under the indentures governing the senior unsecured notes. Additionally, if there is increased volatility or a disruption in the global capital and credit markets, it could impair DPS’s ability to access these markets for purposes of funding a required repurchase on commercially acceptable terms.

Maple Parent and DPS will incur direct and indirect costs as a result of the Transaction. Maple Parent and DPS will incur substantial expenses in connection with and as a result of consummating the Transaction.

A portion of the transaction costs related to the Transaction will be incurred regardless of whether the Transaction is consummated. While Maple Parent and DPS have assumed that a certain level of transaction expenses will be incurred, factors beyond Maple Parent’s and DPS’ control could affect the total amount or the timing of these expenses. Many of the expenses that will be incurred, by their nature, are difficult to estimate accurately. These expenses may exceed the costs historically borne by Maple Parent and DPS. These costs could adversely affect the financial condition and results of operations of Maple Parent and DPS prior to the Transaction and of KDP following the Transaction.

The agreements that will govern the indebtedness to be incurred in connection with the Transaction may contain various covenants that impose restrictions on KDP and certain of its subsidiaries that may affect its ability to operate its businesses.

The agreements that will govern the indebtedness to be incurred in connection with the Transaction will contain various affirmative and negative covenants that may, subject to certain significant exceptions, restrict the ability of KDP and certain of its subsidiaries to incur debt and the ability of KDP and certain of its subsidiaries to, among other things, have liens on their property, and/or merge or consolidate with any other person or sell or convey certain of their assets to any one person, and engage in certain sale and leaseback transactions. The ability of KDP and its subsidiaries to comply with these provisions may be affected by events beyond their control. Failure to comply with these covenants could result in an event of default, which, if not cured or waived, could accelerate its repayment obligations and could result in a default and acceleration under other agreements containing cross-default provisions. Under these circumstances, KDP might not have sufficient funds or other resources to satisfy all of its obligations.

The Transaction will expose us to risks inherent in the coffee and appliances business, and risks inherent in those geographies where Keurig currently operates.

If consummated successfully, the Transaction would represent a significant transformation of our existing business. Upon completion of the Transaction, we would be subject to a variety of risks associated with the coffee and small appliances business, in addition to those we already face in the LRB industry. These risks include changes in consumer preferences, volatility in the prices of raw materials, consumer perceptions of the brands, competition in the retail market place and other risks. In addition, we will be exposed to risks inherent in operating in geographies in which we have not operated in or have been less present in the past.


16


RISKS RELATED TO OUR CURRENT DPS BUSINESS

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.
Our distribution agreements with our allied brands could be terminated.
Approximately 82% of our 2017 Packaged Beverages net sales of branded products came 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, FIJI mineral water, Big Red, BODYARMOR, Vita Coco coconut water, AriZona tea, Core Hydration, Neuro drinks, High Brew, Hydrive energy drinks and Sparkling Fruit 2 O . We are subject to a risk of our allied brands, terminating their distribution agreements with us, which could negatively affect our business and financial performance. 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.
Over the years, the federal, state and local governments of the U.S. and the federal government of Mexico have imposed or attempted to impose indirect taxes on the manufacturing and/or the distribution of certain sugar-sweetened beverages, which are commonly referred to as a "beverage tax" or "sugar tax". These regressive taxes were primarily the result of concerns about the public health consequences and health care costs associated with obesity. As federal, state and local governments in the U.S., and foreign governments experience significant budget deficits, some lawmakers continue to single out beverages among a number of revenue-raising items. As such, federal, state, and other local and foreign governments could continue to seek to impose a beverage or sugar tax. 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.
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.

17


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.  
We depend on a small number of large retailers for a significant portion of our sales.
Food and beverage retailers in the U.S. have been consolidating, resulting in large, sophisticated retailers with increased buying power. They are in a better position to resist our price increases and demand lower prices. They also have leverage to require us to provide larger, more tailored promotional and product delivery programs. If we and our bottlers and distributors do not successfully provide appropriate marketing, product, packaging, pricing and service to these retailers, our product availability, sales and margins could suffer. Certain retailers make up a significant percentage of our products' retail volume, including volume sold by our bottlers and distributors. Some retailers also offer their own private label products that compete with some of our brands. The loss of sales of any of our products by a major retailer could have a material adverse effect on our business and financial performance.
We 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 42.4% o f 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 non-premium bottled water and ready-to-drink coffee compared to 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.
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, 2017 , we had $10,022 million of total assets, of which approximately $7,342 million were goodwill and other intangible assets. 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. We recognized approximately $1 million in impairment charges for our Aguafiel brand based upon our annual impairment analysis performed as of October 1, 2017 . 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 4 to our Audited Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data," in this Annual Report on Form 10-K.

18


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, 2017 , our total indebtedness was $4,479 million .
This amount of debt could have important consequences to us and our investors, including requiring a portion of our cash flow from operations to make interest payments on this debt and increasing our vulnerability to general adverse economic and industry conditions, which could impact our debt maturity profile.
While we believe we will have the ability to service our debt and will have access to additional sources of capital in the future if and when needed, that will depend upon our results of operations and financial position at the time, the then-current state of the credit and financial markets, and other factors that may be beyond our control.
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.
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, increases in participants enrolled, 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.

19


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.
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.

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Weather, natural disasters, climate change legislation and the availability of water could adversely affect our business.
Unseasonable or unusual weather, natural disasters or long-term climate changes may negatively impact the demand for our products, our ability to produce our products and the price or availability of raw materials, energy and fuel. Unusually cool weather during the summer months may result in reduced demand for our products and have a negative effect on our business and financial performance.
There is growing political and scientific sentiment that increased concentrations of carbon dioxide and other greenhouse gases in the atmosphere are influencing global weather patterns ("global warming"). Concern over climate change, including global warming, has led to legislative and regulatory initiatives directed at limiting greenhouse gas ("GHG") emissions. For example, proposals that would impose mandatory requirements on GHG emissions continue to be considered by policy makers in the countries in which we operate. Laws enacted that directly or indirectly affect our production, distribution, packaging, cost of raw materials, fuel, ingredients and water could all negatively impact our business and financial results.
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, 2017 , approximately 7,500 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.

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In some cases, we license products from third parties that we distribute. The licensor may be able to terminate the license arrangement upon an agreed period of notice, in some cases without payment to us of any termination fee. The termination of any material license arrangement could adversely affect our business and financial performance.
Our facilities and operations may require substantial investment and upgrading.
We have an ongoing program of investment and upgrading in our manufacturing, distribution and other facilities. We expect to incur significant costs to upgrade or keep up-to-date various facilities and equipment or restructure our operations, including closing existing facilities or opening new ones. If our investment and restructuring costs are higher than anticipated or our business does not develop as anticipated to appropriately utilize new or upgraded facilities, our costs and financial performance could be negatively affected.
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.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.

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ITEM 2. PROPERTIES
As of December 31, 2017 , we owned or leased 154 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

 
9

 
1

 

 

 

 
11

Manufacturing facilities
12

 
5

 
1

 

 

 

 
18

Principal distribution centers and warehouse facilities
37

 
61

 

 

 

 

 
98

 
50

 
75

 
2

 

 

 

 
127

Mexico and Canada:
 
 
 
 
 
 
 
 
 
 
 
 
 
Office buildings

 
1

 

 

 

 
1

 
2

Manufacturing facilities

 

 

 

 
4

 

 
4

Principal distribution centers and warehouse facilities

 

 

 

 
4

 
17

 
21

 

 
1

 

 

 
8

 
18

 
27

Total
50

 
76

 
2

 

 
8

 
18

 
154

____________________________
(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 15 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.

23


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 stoc k for the two years en ded December 31, 2017 and 2016 , and the frequency and amount of dividends declared on our stock during these periods, is set forth in Item 6 and incorporated herein by reference.
As of February 8, 2018 , there were approximately 12,000 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 or on an amendment on Form 10-K/A , to be f iled with the SEC , is incorporated herein by reference.
For the years ended December 31, 2017, 2016 and 2015, 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 declared aggregate dividends of $2.32 , $2.12 and $1.92 per share on outstanding common stock during the years ended December 31, 2017 , 2016 and 2015 , respectively.
We expect to return our excess cash flow to our stockholders from time to time through our share 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. Under the terms of the Merger Agreement, until the closing of the Transaction or the termination of the Merger Agreement, we are restricted to the quarterly dividend declared to be paid on April 12, 2018 and the special dividend to be paid upon consummation of the Transaction. Furthermore, during negotiation of the Transaction with Maple Parent, we suspended our share repurchase program and it remains suspended at this time under the terms of the Merger Agreement.
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.
COMMON STOCK REPURCHASES
Our share repurchase activity for the quarter ended December 31, 2017 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, 2017 – October 31, 2017
 
308

 
$
86.96

 
308

 
$
784,086

November 1, 2017 – November 30, 2017
 
597

 
85.60

 
597

 
732,988

December 1, 2017 – December 31, 2017
 

 

 

 
732,988

For the quarter ended December 31, 2017
 
905

 
86.06

 
905

 
 
____________________________
(1)
As of December 31, 2017 , the Board has authorized us to repurchase an amount of up to $5 billion of our outstanding common stock. This authorization has no expiration date.

24


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, 2012 , with dividends reinvested quarterly.

Comparison of Total Returns
Assumes Initial Investment of $100
CHART-ECF614D21F655244BA0A01.JPGClick to enlarge

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.

25


ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected historical financial data for the years ended December 31, 2017 , 2016 , 2015 , 2014 and 2013 . 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,
  (in millions, except per share data)
2017
 
2016
 
2015
 
2014
 
2013
Statements of Income Data:
 

 
 

 
 

 
 

 
 

Net sales
$
6,690

 
$
6,440

 
$
6,282

 
$
6,121

 
$
5,997

Gross profit
3,995

 
3,858

 
3,723

 
3,630

 
3,498

Income from operations
1,388

 
1,433

 
1,298

 
1,180

 
1,046

Net income (5)
1,076

 
847

 
764

 
703

 
624

Basic earnings per share (1)(5)
$
5.91

 
$
4.57

 
$
4.00

 
$
3.59

 
$
3.08

Diluted earnings per share (1)(5)
5.89

 
4.54

 
3.97

 
3.56

 
3.05

Dividends declared per share
2.32

 
2.12

 
1.92

 
1.64

 
1.52

Statements of Cash Flows Data:
 
 
 
 
 
 
 
 
 
Cash provided by (used in):
 
 
 
 
 
 
 
 
 
Operating activities (4)
$
1,038

 
$
961

 
$
1,014

 
$
1,033

 
$
872

Investing activities (3)
(1,763
)
 
(189
)
 
(194
)
 
(185
)
 
(195
)
Financing activities (2)(4)
(907
)
 
108

 
(137
)
 
(758
)
 
(886
)

 
As of December 31,
  (in millions)
2017
 
2016
 
2015
 
2014
 
2013
Balance Sheet Data:
 
 
 
 
 
 
 
 
 
Goodwill and other intangible assets, net (3)
$
7,342

 
$
5,649

 
$
5,651

 
$
5,674

 
$
5,682

Total assets (2)
10,022

 
9,791

 
8,869

 
8,265

 
8,191

Short-term borrowings and current portion of long-term obligations
79

 
10

 
507

 
3

 
66

Long-term obligations (2)
4,400

 
4,468

 
2,875

 
2,580

 
2,498

Other non-current liabilities
1,933

 
2,138

 
2,228

 
2,353

 
2,386

Total stockholders’ equity
2,451

 
2,134

 
2,183

 
2,294

 
2,277

____________________________
(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, 2017 , 2016 , 2015 , 2014 and 2013 , we repurchased and retired 4.4 million shares, 5.7 million shares, 6.5 million shares, 6.8 million shares and 8.7 million shares, respectively.
(2)
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.
(3)
For the year ended December 31, 2017, investing activities and goodwill and other intangible assets, net were impacted as a result of the Bai Brands Merger. Refer to Note 3 of the Notes to our Audited Consolidated Financial Statements for additional information.
(4)
For the years ended December 31, 2016, 2015, 2014 and 2013, excess tax benefits on stock based compensation were reclassified from financing activities to operating activities to conform to the current year presentation as a result of the adoption of Accounting Standards Update 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share Based Payment Accounting. Refer to Note 2 of the Notes to our Audited Consolidated Financial Statements for further information.
(5)
For the year ended December 31, 2017, net income, basic earnings per share, and diluted earnings per share were impacted by the legislation commonly referred to as the Tax Cuts and Jobs Act of 2017. Refer to Note 5 of the Notes to our Audited Consolidated Financial Statements for further information.

26


The following table summarizes the Company 's information on net sales, gross profit, net income, earnings per share and other quarterly financial data by quarter for the years ended December 31, 2017 and 2016 . This data, with the exception of the common stock prices, was derived from the Company 's unaudited consolidated financial statements.
(in millions, except per share data)
First
 
Second
 
Third
 
Fourth
For the Year Ended December 31,
Quarter
 
Quarter
 
Quarter
 
Quarter
2017
 

 
 

 
 

 
 

Net sales
$
1,510

 
$
1,797

 
$
1,740

 
$
1,643

Gross profit
903

 
1,079

 
1,033

 
980

Net income (1)
177

 
188

 
203

 
508

Earnings per common share — basic (1)
$
0.97

 
$
1.02

 
$
1.12

 
$
2.82

Earnings per common share — diluted (1)
0.96

 
1.02

 
1.11

 
2.81

Weighted average common shares outstanding — basic
183.4

 
183.2

 
181.4

 
180.1

Weighted average common shares outstanding — diluted
184.6

 
183.7

 
182.1

 
180.8

Dividend declared per share
$
0.58

 
$
0.58

 
$
0.58

 
$
0.58

Common stock price
 
 
 
 
 
 
 
High
$
98.17

 
$
99.47

 
$
93.77

 
$
97.84

Low
89.06

 
89.88

 
87.28

 
81.70

2016
 

 
 

 
 

 
 

Net sales
$
1,487

 
$
1,695

 
$
1,680

 
$
1,578

Gross profit
885

 
1,025

 
997

 
951

Net income
182

 
260

 
240

 
165

Earnings per common share — basic
$
0.97

 
$
1.40

 
$
1.30

 
$
0.90

Earnings per common share — diluted
0.96

 
1.39

 
1.29

 
0.90

Weighted average common shares outstanding — basic
187.6

 
185.7

 
184.8

 
183.6

Weighted average common shares outstanding — diluted
189.0

 
186.5

 
185.7

 
184.7

Dividend declared per share
$
0.53

 
$
0.53

 
$
0.53

 
$
0.53

Common stock price
 
 
 
 
 
 
 
High
$
95.87

 
$
96.65

 
$
98.80

 
$
91.14

Low
87.18

 
86.03

 
89.45

 
81.05

____________________________
(1)
Net income and basic and diluted earnings per share in the fourth quarter of the year ended December 31, 2017 were impacted by the legislation commonly referred to as the Tax Cuts and Jobs Act.



27


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, 2017 , 2016 and 2015 , which we refer to as " 2017 ", " 2016 " and " 2015 ", respectively.
The following discussion does not reflect the Company's expectations with respect to its business, operations and financial performance following the completion of the Transaction. The Transaction is expected to have a material effect on such business, operations and financial performance. Accordingly, past performance may not be indicative of expected future results.
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, 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 2017 , 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 consumer preferences and economic factors, have created category headwinds for a number of our products during recent years. The key trends and uncertainties that could affect our business include:
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.
Allied brand relationships.    Allied brands could terminate their distribution agreements, primarily as a result of ownership changes of these brand companies.
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.
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.

28


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.
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.
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.
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.
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
As of December 31, 2017, we report our business in four operating segments:
The Beverage Concentrates segment reflects sales of the Company 's branded concentrates and syrup to third party bottlers primarily in the U.S. and Canada. Most of the brands in this segment are carbonated soft drink brands.
The Packaged Beverages Excluding Bai segment reflects sales in the U.S. and Canada from the manufacture and distribution of finished beverages and other products, including sales of the Company 's own brands and third party brands, through both DSD and WD .
The Bai segment reflects sales of Bai Brands finished goods to third party distributors, primarily in the U.S., as net sales to the Packaged Beverages Excluding Bai segment are eliminated in consolidation. Refer to Note 3 of the Notes to our Audited Consolidated Financial Statements for further information regarding the impact of Bai Brands Merger on the Company's net sales presented in the Consolidated Statements of Income.
The Latin America Beverages segment reflects sales in the Mexico, Caribbean, and other international markets from the manufacture and distribution of concentrates, syrup and finished beverages.

The Company has determined that Packaged Beverages Excluding Bai and Bai, which have been identified as operating segments, meet the aggregation criteria under U.S. GAAP. As such, these segments have been aggregated into one reportable segment, Packaged Beverages, based on similarities among the operating units including economic characteristics, the nature of the products and services, the nature of the production processes, the types or class of customer for their products and services, the methods used to distribute their products and services and the nature of the regulatory environment.

29


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.

30


RESULTS OF OPERATIONS
Executive Summary - 2017 Financial Overview and Recent Developments
CHART-65DF780A616B54C3AABA01.JPGClick to enlarge   CHART-E033CED41E7952489B6A01.JPGClick to enlarge CHART-C8886E19992D5206A46.JPGClick to enlarge         CHART-D12BF108A5F95C50AA7A01.JPGClick to enlarge
Net income increased $229 million , driven primarily by the income tax benefits related to the impact of the recent federal tax law change and the adoption of the new accounting standard for stock-based compensation, partially offset by the impact of the Bai Brands Merger, losses on early extinguishment of debt completed during the second and third quarter of 2017, and the unfavorable comparison to the gain on the extinguishment of a multi-employer pension plan withdrawal liability recorded in the prior year.
On December 22, 2017, the federal government enacted the legislation commonly referred to as the Tax Cuts and Jobs Act (the "TCJA"). Under the TCJA, our U.S. federal statutory tax rate will be reduced from 35% to 21% , beginning in 2018, with some related business deductions and credits either reduced or eliminated. As a result, we have recognized an income tax benefit of $297 million , primarily driven by the revaluation of our deferred tax liabilities, which increased diluted earnings per share by $1.62 for the year ended December 31, 2017 . Beginning in 2018, we believe our effective tax rate will be approximately 26% - 27% .
On January 31, 2017, we completed the Bai Brands Merger. For the year ended December 31, 2017 , the primary impacts of the Bai Brands Merger decreased diluted earnings per share in total by $0.26 .
The drivers of this change include:
The interest expense associated with the financing to complete the Bai Brands Merger, which decreased diluted earnings per share by $0.18 for the year ended December 31, 2017 ;
The operations of Bai Brands, which decreased diluted earnings per share by $0.17 for the year ended December 31, 2017 ;
The associated transaction and integration expenses, which decreased diluted earnings per share by $0.08 for the year ended December 31, 2017 ;
The gain on the step-acquisition of Bai Brands, which increased diluted earnings per share by $0.10 for the year ended December 31, 2017 ; and

31


The $21 million benefit as a result of the renegotiation of a manufacturing contract acquired during the Bai Brands Merger, which increased diluted earnings per share by $0.07 for the year ended December 31, 2017 .
The impact of the operations of Bai Brands includes:
The incremental profit margin benefit we experienced in the year ended December 31, 2017 as the brand owner for Bai Brands;
The acquired Bai Brands operations, which includes the shipments to third parties since the Bai Brands Merger, partially offset by the $9 million initial profit in stock adjustment recorded during the first quarter of 2017 related to Bai Brands inventories; and
The associated purchase accounting adjustments (refer to Note 3 of the Notes to our Audited Consolidated Financial Statements for further information).
During the years ended December 31, 2017 , 2016 , and 2015 , we repurchased 4.4 million , 5.7 million , and 6.5 million shares of our common stock, respectively, valued at approximately $399 million in 2017 , $519 million in 2016 , and $521 million in 2015 .
On January 5, 2018, the Company acquired a 5.4% equity interest in Core Organics LLC ("Core") for $18 million.
On January 29, 2018, DPS and Keurig announced that the companies have entered into the Merger Agreement to create Keurig Dr Pepper, a new beverage company of scale with a portfolio of iconic consumer brands and expanded distribution capability to reach virtually every point-of-sale in North America. Under the terms of the Merger Agreement, which has been unanimously approved by our Board, DPS shareholders will receive $103.75 per share in a special cash dividend and retain their shares in DPS.
During the first quarter of 2018, our Board declared a dividend of $0.58 per share, which will be paid on April 12, 2018, to shareholders of record as of March 21, 2018.
References in the financial tables to percentage changes that are not meaningful are denoted by "NM."
Year Ended December 31, 2017 Compared to Year Ended December 31, 2016
Consolidated Operations
The following table sets forth our consolidated results of operations for the years ended December 31, 2017 and 2016 :
 
For the Year Ended December 31,
 
 
 
 
 
2017
 
2016
 
Dollar
 
Percentage
(dollars in millions, except per share data)
Dollars
 
Percent
 
Dollars
 
Percent
 
Change
 
Change
Net sales
$
6,690

 
100.0
 %
 
$
6,440

 
100.0
 %
 
$
250

 
4
 %
Cost of sales
2,695

 
40.3

 
2,582

 
40.1

 
113

 
4

Gross profit
3,995

 
59.7

 
3,858

 
59.9

 
137

 
4

Selling, general and administrative expenses
2,556

 
38.2

 
2,329

 
36.2

 
227

 
10

Other operating (income) expense, net
(51
)
 
(0.8
)
 
(3
)
 

 
(48
)
 
NM

Income from operations
1,388

 
20.7

 
1,433

 
22.3

 
(45
)
 
(3
)
Interest expense
164

 
2.5

 
147

 
2.3

 
17

 
12

Loss on early extinguishment of debt
62

 
0.9

 
31

 
0.5

 
31

 
NM

Other income, net
(8
)
 
(0.1
)
 
(25
)
 
(0.4
)
 
17

 
NM

Provision for income taxes
95

 
1.4

 
434

 
6.7

 
(339
)
 
(78
)
Net income
1,076

 
16.1
 %
 
847

 
13.2
 %
 
229

 
27
 %
Effective tax rate
8.1
%
 
NM

 
33.8
%
 
NM

 
NM

 
NM

Volume (BCS). Volume (BCS) increased 1% for the year ended December 31, 2017 compared with the year ended December 31, 2016 . In the U.S. and Canada, volume was 1% higher, and in Mexico and the Caribbean, volume in creased 3% compared with the prior year. Branded CSD volume was 1% higher, while NCB volume increased 4% over the prior year.

32


In branded CSDs, Canada Dry increased 5% due to continued growth in the ginger ale category. Peñafiel increased 5% due to distribution gains, increased promotional activity and product innovation, partially offset by increased competition, in our Latin America Beverages segment, and Squirt increased 3% . Schweppes also grew by 3% due to continued growth in the ginger ale category. These increases were partially offset by a 2% decline in 7UP and a 2% decrease in A&W. Our other CSD brands were also 2% lower, led by Rockstar as a result of the loss of distribution rights beginning in April 2017. Dr Pepper was flat compared to the year ago period as increases in our fountain business were fully offset by declines in TEN and diet.
In branded NCBs, Bai increased 99% driven by the acquired Bai Brands shipments to third parties since the Bai Brands Merger and continued growth in our existing distribution as a result of distribution gains and product innovation. Our growth allied brands gained 40% due primarily to distribution gains for BODYARMOR, Core and Fiji, and product innovation for BODYARMOR. Clamato increased 3% compared with the year ago period. Mott's grew 1% as growth in our sauce products were partially offset by declines in juice. These increases were partially offset by a 3% decline in Snapple due to competitive headwinds, the de-emphasis on our value products, and lower promotional activity, partially offset by the launch of our new PET packaging for our 16 oz. bottles and the Takes 2 to Mango flavor innovation. Our other NCB brands were 4% lower compared to the prior period, led by Hawaiian Punch and AriZona.
Net Sales. Net sales in creased $250 million , or approximately 4% , for the year ended December 31, 2017 , compared with the year ended December 31, 2016 . The primary drivers of the increase in net sales included:
Increase in shipments, excluding the loss of the Rockstar distribution rights, which grew net sales by 2.0% ;
Favorable product and package mix, which increased net sales by 1.5% ;
$64 million of acquired Bai Brands shipments to third parties since the Bai Brands Merger, which raised net sales by 1.0% ;
Higher pricing and lower discounts as a result of a favorable comparison of the annual true-up of our estimated customer incentive liability, which increased net sales by 0.5% ;
Unfavorable segment mix, which reduced our net sales by 0.5% ; and
The loss of the Rockstar distribution rights, which lowered net sales by 0.5% .
Gross Profit . Gross profit in creased $137 million , or approximately 4% , for the year ended December 31, 2017 compared with the year ended December 31, 2016 . Gross margin was 59.7% for the year ended December 31, 2017 compared to the gross margin of 59.9% for the year ended December 31, 2016 . The following drivers impacted the gross margin:
Unfavorable product and package mix, which reduced our gross margin by 0.5% ;
Increase in our other manufacturing costs, which includes the impact of a $6 million default by a supplier of resin to our operations in Mexico, reduced our gross margin by 0.4% .
The unfavorable change in our last-in, first-out ("LIFO") inventory provision, driven primarily by apples, combined with higher commodity costs, led by packaging, reduced our gross margin by 0.4% ;
Unfavorable foreign currency effects, which decreased our gross margin by 0.1% ; and
Increase in our gross margin of 0.7% related to the incremental profit margin benefit we experienced as a result of becoming the brand owner for Bai Brands and the acquired Bai Brands shipments to third parties since the Bai Brands Merger, partially offset by the $9 million initial profit in stock adjustment as a result of the Bai Brands Merger recorded during the first quarter of 2017;
Favorable segment mix, which raised our gross margin by 0.2% ;
Higher pricing and lower discounts as a primary result of a favorable comparison of the annual true-up of our estimated customer incentive liability, which raised our gross margin by 0.2% ; and
Ongoing productivity improvements, which increased our gross margin by 0.2% .
Selling, General and Administrative Expenses. Selling, general and administrative ("SG&A") expenses increased $227 million for the year ended December 31, 2017 compared with the prior year. The primary driver of the increase in SG&A expenses was the impact of the Bai Brands Merger, which includes $114 million of acquired operating costs, primarily $59 million of marketing investments as well as people costs, and $20 million in transaction expenses. Other drivers of the increase include higher people costs, driven by inflationary increases and additional frontline labor investment, a $31 million unfavorable comparison in the mark-to-market activity on commodity derivative contracts, and an $11 million increase in planned organic marketing investments. These increases were partially offset by lower incentive compensation.

33


The unfavorable mark-to-market comparison on commodity derivative contracts within SG&A expenses, which is included in unallocated corporate costs, was driven by no unrealized gains or losses for the year ended December 31, 2017 , versus $31 million in unrealized gains in the year ago period.
Other Operating (Income) Expense, Net. Other operating (income) expense, net had a favorable change of $48 million due primarily to the $28 million gain on the step-acquisition of Bai Brands and the $21 million benefit as a result of the renegotiation of a manufacturing contract acquired during the Bai Brands Merger. Refer to Note 3 of the Notes to our Audited Consolidated Financial Statements for further information.
Income from Operations. Income from operations de creased $45 million to $1,388 million for the year ended December 31, 2017 , due primarily to the increase in SG&A expenses, partially offset by the increase in gross profit and the favorable change in other operating (income) expense, net.
Interest Expense. Interest expense increased $17 million for the year ended December 31, 2017 compared with the year ended December 31, 2016 , due primarily to the higher average debt balance associated with the senior unsecured notes issued late in the fourth quarter of 2016 to fund the Bai Brands Merger, partially offset by interest savings associated with the tender offer for the 6.82% senior notes due May 1, 2018 ("2018 Notes") and the 7.45% senior notes due May 1, 2038 (the "2038 Notes") during the second quarter of 2017 and the redemption of the remaining 2018 Notes during the third quarter of 2017. These transactions were effectively refinanced by the issuance of other senior unsecured notes at a lower interest rate.
Loss on Early Extinguishment of Debt. In June 2017, we completed a tender offer on a portion of our 2038 Notes and 2018 Notes and retired, at a premium, an aggregate principal amount of $125 million of the 2038 Notes and $63 million of the 2018 Notes. The loss on early extinguishment of the 2038 and 2018 Notes was $49 million , which was comprised of $62 million for the tender offer consideration, the early tender premium and write off of deferred financing costs, partially offset by a $13 million gain on the termination of an interest rate swap related to the 2038 Notes.
In July 2017, we recognized a $13 million loss on early extinguishment of debt as we completed a redemption of our remaining 2018 Notes and retired, at a premium, an aggregate principal amount of $301 million of the 2018 Notes. The $13 million loss on early extinguishment of debt was comprised of the make-whole premium and write off of deferred financing costs.
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 .
Other Income, Net. Other income, net decreased $17 million for the year ended December 31, 2017 compared with the year ended December 31, 2016 as a result of the unfavorable comparison to a $21 million gain on the extinguishment of a multi-employer pension plan withdrawal liability recorded in the prior year.
Effective Tax Rate. The effective tax rates for the year ended December 31, 2017 and 2016 were 8.1% and 33.8% , respectively. For the year ended December 31, 2017, the provision for income taxes included an income tax benefit of $297 million driven by the impact of the recent U.S. federal tax law change and an income tax benefit of $19 million due to the adoption of the new accounting standard for stock-based compensation. Refer to Note 5 and Note 2 of the Notes to our Audited Consolidated Financial Statements for further information on the impact of the recent federal tax law change and adoption of the new accounting standard. 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.

34


Results of Operations by Segment
The following tables set forth net sales and SOP for our segments for the years ended December 31, 2017 and 2016 , as well as the other amounts necessary to reconcile our total segment results to our consolidated results presented in accordance with U.S. GAAP:
 
For the Year Ended
 
December 31,
 (in millions)
2017
 
2016
Segment Results — Net sales
 
 
 
Beverage Concentrates
$
1,332

 
$
1,284

Packaged Beverages
4,871

 
4,696

Latin America Beverages
487

 
460

Net sales
$
6,690

 
$
6,440

 
 
 
 
 
For the Year Ended
 
December 31,
(in millions)
2017
 
2016
Segment Results — SOP
 
 
 
Beverage Concentrates
$
865

 
$
834

Packaged Beverages
691

 
771

Latin America Beverages
62

 
78

Total SOP
1,618

 
1,683

Unallocated corporate costs
281

 
253

Other operating (income) expense, net
(51
)
 
(3
)
Income from operations
1,388

 
1,433

Interest expense, net
161

 
144

Loss on early extinguishment of debt
62

 
31

Other income, net
(8
)
 
(25
)
Income before provision for income taxes and equity in (loss) earnings of unconsolidated subsidiaries
$
1,173

 
$
1,283

BEVERAGE CONCENTRATES
The following table details our Beverage Concentrates segment's net sales and SOP for the years ended December 31, 2017 and 2016 :
 
For the Year Ended
 
 
 
 
 
December 31,
 
Dollar
 
Percentage
(in millions)
2017
 
2016
 
Change
 
Change
Net sales
$
1,332

 
$
1,284

 
$
48

 
4
%
SOP
865

 
834

 
31

 
4

Net Sales. Net sales in creased $48 million for the year ended December 31, 2017 , compared with the year ended December 31, 2016 . The in crease was due to higher pricing, a 2% increase in concentrate case sales and lower discounts primarily as a result of a favorable comparison of the annual true-up of our estimated customer incentive liability.
SOP. SOP in creased $31 million for the year ended December 31, 2017 , compared with the year ended December 31, 2016 , primarily driven by an increase in net sales which was partially offset by higher SG&A expenses. The increase in SG&A expenses was primarily the result of a $13 million increase in marketing investments and higher people costs, partially offset by lower incentive compensation.

35


Volume (BCS). Volume (BCS) increased 1% for the year ended December 31, 2017 , compared with the year ended December 31, 2016 . Canada Dry and Schweppes had gains of 4% and 2% , respectively, due to continued growth in the ginger ale category for both brands and the sparkling water category for Canada Dry. These increases were partially offset by decreases in A&W and 7UP, which declined 2% and 1% , respectively, compared to the prior year. Our other brands declined 1% in total, primarily as a result of discontinuing the distribution of Country Time in 2016. Dr Pepper was flat compared to the prior year driven by increases in our fountain business fully offset by declines in TEN and diet.
PACKAGED BEVERAGES
The following table details our Packaged Beverages segment's net sales and SOP for the years ended December 31, 2017 and 2016 :
 
For the Year Ended
 
 
 
 
 
December 31,
 
Dollar
 
Percentage
(in millions)
2017
 
2016
 
Change
 
Change
Net sales
$
4,871

 
$
4,696

 
$
175

 
4
 %
SOP
691

 
771

 
(80
)
 
(10
)
Volume. Branded CSD volumes were flat for the year ended December 31, 2017 compared with the year ended December 31, 2016 . Canada Dry in creased 5% due to continued growth in the ginger ale category. This increase was fully offset by a 2% decrease in 7UP, a 2% decline in A&W and a 2% decline in other CSD brands. Dr Pepper was flat as growth in regular was fully offset by declines in TEN and diet.
Branded NCB volumes in creased 4% for the year ended December 31, 2017 compared with the year ended December 31, 2016 . Bai increased 99% driven by the acquired Bai Brands shipments to third parties since the Bai Brands Merger and continued growth in our existing distribution as a result of distribution gains and product innovation. Our growth allied brands gained 40% due primarily to distribution gains for BODYARMOR, Core and Fiji, and product innovation for BODYARMOR. Mott's increased 1% compared to the prior year as growth in our sauce products was partially offset by declines in juice. Clamato increased 3% . These increases were partially offset as Snapple declined 3% due to competitive headwinds, the de-emphasis on our value products, and lower promotional activity partially offset by the launch of our new PET packaging for our 16 oz. bottles and the Takes 2 to Mango flavor innovation. Other NCB brands were 5% lower, led by Rockstar, AriZona and Hawaiian Punch. The decline in Rockstar is due to the loss of distribution rights beginning in April 2017.
Contract manufacturing increased  1%  for the  year ended December 31, 2017 compared with the year ended December 31, 2016 .
Net Sales. Net sales in creased $175 million for the year ended December 31, 2017 compared with the year ended December 31, 2016 . Net sales increased due to favorable product and package mix, as a result of our NCBs, including our allied brands, $64 million in acquired Bai Brands shipments to third parties since the Bai Brands Merger, and higher organic sales volumes. These increases were partially offset by the loss of the Rockstar distribution.
SOP. SOP de creased $80 million for the year ended December 31, 2017 , compared with the year ended December 31, 2016 , as increases in SG&A expenses and cost of sales more than offset the increase in net sales.
Cost of sales increased as a primary result of higher costs associated with product and package mix, as a result of our NCBs, including our allied brands, and an increase in costs associated with the acquired Bai Brands shipments to third parties since the Bai Brands Merger and the initial $9 million profit in stock adjustment as a result of the Bai Brands Merger. Cost of sales was additionally impacted by the increase in other manufacturing costs and the unfavorable change in our LIFO inventory provision. These increases were partially offset by the incremental profit margin benefit we experienced as a result of becoming the brand owner for Bai Brands and ongoing productivity improvements.

SG&A expenses increased driven primarily by the Bai Brands Merger, which includes the acquired operating costs, primarily marketing and people costs, as well as transaction and integration expenses. SG&A expenses further increased due to higher people costs, driven by inflationary increases and additional frontline labor investment.

36


LATIN AMERICA BEVERAGES
The following table details our Latin America Beverages segment's net sales and SOP for the years ended December 31, 2017 and 2016 :
 
For the Year Ended
 
 
 
 
 
December 31,
 
Dollar
 
Percentage
(in millions)
2017
 
2016
 
Change
 
Change
Net sales
$
487

 
$
460

 
$
27

 
6
 %
SOP
62

 
78

 
(16
)
 
(21
)
Volume. Sales volume in creased 3% for the year ended December 31, 2017 as compared with the year ended December 31, 2016 . The in crease in sales volume was primarily driven by a 5% in crease in Peñafiel as a result of distribution gains, increased promotional activity and product innovation, partially offset by increased competition. Squirt had a 2% gain due to increased sales to third party bottlers and product innovation. Clamato increased 2% due to product innovation, distribution gains and increased promotional activity. Our other brands increased approximately 3% , driven by Crush.
Net Sales. Net sales in creased $27 million for the year ended December 31, 2017 compared with the year ended December 31, 2016 . Net sales in creased as a result of increased sales volume and higher pricing, partially offset by unfavorable package and product mix, unfavorable foreign currency translation of $3 million and higher discounts.
SOP. SOP de creased $16 million for the year ended December 31, 2017 compared with the year ended December 31, 2016 , driven by increases in cost of sales and SG&A expenses, partially offset by an increase in net sales.
Cost of sales increased compared to the prior year as a result of higher commodity costs, led by packaging, increased costs associated with gains in sales volume, unfavorable foreign currency effects and the $6 million default by a supplier of resin to our operations in Mexico during the third quarter of 2017. These increases were partially offset by favorable package and product mix.
SG&A expenses increased compared to the prior year as a result of higher people costs, increased logistic costs driven by higher rates and gains in sales volumes, and increases in other operating costs. These drivers were partially offset by the favorable comparison to the $4 million arbitration award related to our former Mexican joint venture in the prior year and favorable foreign currency effects.
The impact of the net unfavorable foreign currency effects on costs of sales and SG&A expenses, totaled $8 million .
Non-GAAP Financial Information
We report our financial results in accordance with U.S. GAAP. However, we believe that certain non-GAAP measures that reflect the way management evaluates the business may provide investors with additional information regarding our results, trends and ongoing performance on a comparable basis.
Core results is defined as reported results adjusted for the unrealized mark-to-market impact of commodity derivatives and interest rate derivatives not designated as hedges in accordance with U.S. GAAP and certain items that are excluded for comparison to prior year periods. Management believes that core results provide a comparable basis to evaluate our results period over period, which is also used as the basis for incentive compensation for our employees.
The certain items excluded for the year ended December 31, 2017 , are (i) the impact of transaction and integration expenses associated with the Bai Brands Merger and (ii) restructuring charges associated with a limited workforce reduction, which will primarily be paid during 2018.

 
For the Year Ended December 31, 2017
 
Reported
 
Mark to Market
 
Workforce Reduction Costs
 
Transition and Integration Expenses
 
Core
Income from operations
$
1,388

 
$
(23
)
 
$
3

 
$
23

 
$
1,391



37


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
)
 
(143
)
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

 
0.8

 

 

 
31

 
NM

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

 
(24
)
 
NM

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

 
19.9

 
1,184

 
18.8

 
99

 
NM

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 primarily in our club channel, distribution gains for Bai, 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.
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%.

38


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 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.
SG&A Expenses. 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 favorable comparison related to the brand value impairment of Garden Cocktail recognized in the prior year and a $7 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.
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.

39


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.
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.

40


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.
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, Fiji and Core Hydration, and incremental promotional activity behind Bai 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.

41


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 :