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DR PEPPER SNAPPLE GROUP, INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Customer Marketing Programs and Incentives
The Company offers a variety of incentives and discounts to bottlers, customers and consumers through various programs to
support the distribution of its products. These incentives and discounts include cash discounts, price allowances, volume based
rebates, product placement fees and other financial support for items such as trade promotions, displays, new products, consumer
incentives and advertising assistance. These incentives and discounts are reflected as a reduction of gross sales to arrive at net
sales. The aggregate deductions from gross sales recorded in relation to these programs, excluding contract manufacturing
customers, were approximately $3,686 million, $3,419 million and $3,057 million during the years ended December 31, 2010,
2009 and 2008, respectively. During 2009, the Company upgraded its SAP platform in the Direct Store Delivery system (“DSD”).
As part of the upgrade, DPS harmonized its gross list price structure across locations. The impact of the change increased gross
sales and related discounts by equal amounts on customer invoices. Net sales to the customers were not affected. The amounts of
trade spend are larger in the Packaged Beverages segment than those related to other parts of our business. Accruals are established
for the expected payout based on contractual terms, volume-based metrics and/or historical trends and require management
judgment with respect to estimating customer participation and performance levels.
Transportation and Warehousing Costs
The Company incurred $754 million, $706 million and $775 million of transportation and warehousing costs during the years
ended December 31, 2010, 2009 and 2008, respectively. These amounts, which primarily relate to shipping and handling costs,
are recorded in selling, general and administrative expenses in the Consolidated Statements of Operations.
Advertising and Marketing Expense
Advertising and marketing production costs related to television, print, and radio are expensed as of the first date the
advertisement takes place and amounted to approximately $445 million, $409 million and $356 million during the years ended
December 31, 2010, 2009 and 2008, respectively. These expenses are recorded in selling, general and administrative expenses in
the Consolidated Statements of Operations. As of December 31, 2010 and 2009, advertising and marketing costs of approximately
$32 million and $27 million, respectively, were recorded as prepaid expenses and other current assets in the Consolidated Balance
Sheets.
Research and Development
Research and development costs are expensed when incurred and amounted to $16 million, $15 million and $17 million
during the years ended December 31, 2010, 2009 and 2008, respectively.Additionally, the Company incurred packaging engineering
costs of $6 million, $7 million and $4 million during the years ended December 31, 2010, 2009 and 2008, respectively. These
expenses are recorded in selling, general and administrative expenses in the Consolidated Statements of Operations.
Stock-Based Compensation
The Company accounts for its stock-based compensation plans in accordance with U.S. GAAP,which requires the recognition
of compensation expense in the Consolidated Statements of Operations related to the fair value of employee share-based awards.
Compensation cost is based on the grant-date fair value, which is estimated using the Black-Scholes option pricing model for
stock options. The fair value of restricted stock units is determined based on the number of units granted and the grant date price
of common stock. Stock-based compensation expense is recognized ratably, less estimated forfeitures, over the vesting period in
the Consolidated Statements of Operations.
The stock-based compensation plans in which the Company’s employees participate are described further in Note 16.
Restructuring Costs
The Company periodically records significant facility closing and reorganization charges as restructuring costs when a facility
for closure or other reorganization opportunity has been identified, a closure plan has been developed and the affected employees
notified, all in accordance with U.S. GAAP. Refer to Note 13 for additional information.
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