KEURIG DR PEPPER INC.
10-Ks and 10-Qs
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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2010
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
|
Delaware
(State or other jurisdiction of incorporation or organization) |
98-0517725
(I.R.S. employer identification number) |
|
|
5301 Legacy Drive, Plano, Texas
(Address of principal executive offices) |
75024
(Zip code) |
(972) 673-7000
(Registrant’s telephone number, including area code)
(Registrant’s telephone number, including area code)
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
þ
No
o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes
þ
No
o
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of “large accelerated
filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
|
Large accelerated filer
þ
|
Accelerated filer o |
Non-accelerated filer
o
(Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).
Yes
o
No
þ
As of May 3, 2010, there were 245,690,524 shares of the registrant’s common stock, par value $0.01 per share, outstanding.
DR PEPPER SNAPPLE GROUP, INC.
FORM 10-Q
INDEX
ii
Table of Contents
DR PEPPER SNAPPLE GROUP, INC.
For the Three Months Ended March 31, 2010 and 2009
(Unaudited, in millions, except per share data)
Item 1.
Financial Statements (Unaudited).
| For the | ||||||||
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2010 | 2009 | |||||||
|
Net sales
|
$ | 1,248 | $ | 1,260 | ||||
|
Cost of sales
|
496 | 531 | ||||||
|
|
||||||||
|
Gross profit
|
752 | 729 | ||||||
|
Selling, general and administrative expenses
|
531 | 499 | ||||||
|
Depreciation and amortization
|
31 | 27 | ||||||
|
Other operating expense (income), net
|
3 | (62 | ) | |||||
|
|
||||||||
|
Income from operations
|
187 | 265 | ||||||
|
Interest expense
|
34 | 55 | ||||||
|
Interest income
|
(1 | ) | (1 | ) | ||||
|
Other income, net
|
(3 | ) | (3 | ) | ||||
|
|
||||||||
|
Income before provision for income taxes and equity in earnings of
unconsolidated subsidiaries
|
157 | 214 | ||||||
|
Provision for income taxes
|
68 | 82 | ||||||
|
|
||||||||
|
Income before equity in earnings of unconsolidated subsidiaries
|
89 | 132 | ||||||
|
Equity in earnings of unconsolidated subsidiaries, net of tax
|
— | — | ||||||
|
|
||||||||
|
Net income
|
$ | 89 | $ | 132 | ||||
|
|
||||||||
|
|
||||||||
|
Earnings per common share:
|
||||||||
|
Basic
|
$ | 0.35 | $ | 0.52 | ||||
|
Diluted
|
$ | 0.35 | $ | 0.52 | ||||
|
|
||||||||
|
Weighted average common shares outstanding:
|
||||||||
|
Basic
|
253.3 | 254.2 | ||||||
|
Diluted
|
255.1 | 254.3 | ||||||
|
|
||||||||
|
Cash dividends declared per common share:
|
$ | 0.15 | $ | — | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
1
Table of Contents
DR PEPPER SNAPPLE GROUP, INC.
As of March 31, 2010 and December 31, 2009
(Unaudited, in millions except share and per share data)
| March 31, | December 31, | |||||||
| 2010 | 2009 | |||||||
|
Assets
|
||||||||
|
Current assets:
|
||||||||
|
Cash and cash equivalents
|
$ | 571 | $ | 280 | ||||
|
Accounts receivable:
|
||||||||
|
Trade, net
|
529 | 540 | ||||||
|
Other
|
32 | 32 | ||||||
|
Inventories
|
270 | 262 | ||||||
|
Deferred tax assets
|
59 | 53 | ||||||
|
Prepaid expenses and other current assets
|
169 | 112 | ||||||
|
|
||||||||
|
Total current assets
|
1,630 | 1,279 | ||||||
|
Property, plant and equipment, net
|
1,106 | 1,109 | ||||||
|
Investments in unconsolidated subsidiaries
|
10 | 9 | ||||||
|
Goodwill
|
2,984 | 2,983 | ||||||
|
Other intangible assets, net
|
2,702 | 2,702 | ||||||
|
Other non-current assets
|
543 | 543 | ||||||
|
Non-current deferred tax assets
|
142 | 151 | ||||||
|
|
||||||||
|
Total assets
|
$ | 9,117 | $ | 8,776 | ||||
|
|
||||||||
|
Liabilities and Stockholders’ Equity
|
||||||||
|
Current liabilities:
|
||||||||
|
Accounts payable and accrued expenses
|
$ | 798 | $ | 850 | ||||
|
Deferred revenue
|
36 | — | ||||||
|
Income taxes payable
|
16 | 4 | ||||||
|
|
||||||||
|
Total current liabilities
|
850 | 854 | ||||||
|
Long-term obligations
|
2,566 | 2,960 | ||||||
|
Non-current deferred tax liabilities
|
1,042 | 1,038 | ||||||
|
Non-current deferred revenue
|
861 | — | ||||||
|
Other non-current liabilities
|
736 | 737 | ||||||
|
|
||||||||
|
Total liabilities
|
6,055 | 5,589 | ||||||
|
|
||||||||
|
Commitments and contingencies
|
||||||||
|
|
||||||||
|
Stockholders’ equity:
|
||||||||
|
Preferred stock, $.01 par value, 15,000,000 shares authorized, no shares issued
|
— | — | ||||||
|
Common stock, $.01 par value, 800,000,000 shares authorized, 248,545,188 and
254,109,047 shares issued and outstanding for 2010 and 2009, respectively
|
3 | 3 | ||||||
|
Additional paid-in capital
|
2,962 | 3,156 | ||||||
|
Retained earnings
|
138 | 87 | ||||||
|
Accumulated other comprehensive loss
|
(41 | ) | (59 | ) | ||||
|
|
||||||||
|
Total stockholders’ equity
|
3,062 | 3,187 | ||||||
|
|
||||||||
|
Total liabilities and stockholders’ equity
|
$ | 9,117 | $ | 8,776 | ||||
|
|
||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
2
Table of Contents
DR PEPPER SNAPPLE GROUP, INC
.
For the Three Months Ended March 31, 2010 and 2009
(Unaudited, in millions)
(Unaudited, in millions)
| For the | ||||||||
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2010 | 2009 | |||||||
|
Operating activities:
|
||||||||
|
Net income
|
$ | 89 | $ | 132 | ||||
|
Adjustments to reconcile net income to net cash provided by operations:
|
||||||||
|
Depreciation expense
|
44 | 39 | ||||||
|
Amortization expense
|
10 | 10 | ||||||
|
Amortization of deferred financing costs
|
1 | 5 | ||||||
|
Employee stock-based compensation expense
|
6 | 3 | ||||||
|
Deferred income taxes
|
9 | 17 | ||||||
|
Loss (gain) on disposal of intangible assets and property
|
3 | (62 | ) | |||||
|
Other, net
|
3 | 1 | ||||||
|
Changes in assets and liabilities:
|
||||||||
|
Trade and other accounts receivable
|
10 | (9 | ) | |||||
|
Inventories
|
(7 | ) | (24 | ) | ||||
|
Other current assets
|
(47 | ) | 14 | |||||
|
Other non-current assets
|
(4 | ) | (8 | ) | ||||
|
Accounts payable and accrued expenses
|
(42 | ) | 50 | |||||
|
Income taxes payable
|
16 | 13 | ||||||
|
Deferred revenue
|
36 | — | ||||||
|
Non-current deferred revenue
|
861 | — | ||||||
|
Other non-current liabilities
|
(1 | ) | (3 | ) | ||||
|
|
||||||||
|
Net cash provided by operating activities
|
987 | 178 | ||||||
|
Investing activities:
|
||||||||
|
Purchases of property, plant and equipment
|
(55 | ) | (78 | ) | ||||
|
Purchases of intangible assets
|
— | (5 | ) | |||||
|
Proceeds from disposals of intangible assets
|
— | 68 | ||||||
|
|
||||||||
|
Net cash used in investing activities
|
(55 | ) | (15 | ) | ||||
|
Financing activities:
|
||||||||
|
Repayment of senior unsecured credit facility
|
(405 | ) | (155 | ) | ||||
|
Repurchase of shares of common stock
|
(202 | ) | — | |||||
|
Dividends paid
|
(38 | ) | — | |||||
|
Other, net
|
— | (1 | ) | |||||
|
|
||||||||
|
Net cash used in financing activities
|
(645 | ) | (156 | ) | ||||
|
Cash and cash equivalents — net change from:
|
||||||||
|
Operating, investing and financing activities
|
287 | 7 | ||||||
|
Currency translation
|
4 | (2 | ) | |||||
|
Cash and cash equivalents at beginning of period
|
280 | 214 | ||||||
|
|
||||||||
|
Cash and cash equivalents at end of period
|
$ | 571 | $ | 219 | ||||
|
|
||||||||
|
Supplemental cash flow disclosures of non-cash investing and financing activities:
|
||||||||
|
Capital expenditures included in accounts payable and accrued expenses
|
$ | 25 | $ | 15 | ||||
|
Supplemental cash flow disclosures:
|
||||||||
|
Interest paid
|
$ | 5 | $ | 11 | ||||
|
Income taxes paid
|
13 | 20 | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
Table of Contents
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. General
References in this Quarterly Report on Form 10-Q to “we”, “our”, “us”, “DPS” or “the Company”
refer to Dr Pepper Snapple Group, Inc. and all entities included in our unaudited condensed
consolidated financial statements. Cadbury plc and Cadbury Schweppes plc are hereafter collectively
referred to as “Cadbury” unless otherwise indicated. Kraft Foods Inc. acquired Cadbury on
February 2, 2010. Kraft Foods, Inc. and/or its subsidiaries are hereafter collectively
referred to as “Kraft”.
This Quarterly Report on Form 10-Q refers to some of DPS’ owned or licensed trademarks, trade
names and service marks, which are referred to as the Company’s brands. All of the product names
included in this Quarterly Report on Form 10-Q are either DPS’ registered trademarks or those of
the Company’s licensors.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of America (“U.S.
GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes
required by U.S. GAAP for complete consolidated financial statements. In the opinion of management,
all adjustments, consisting principally of normal recurring adjustments, considered necessary for a
fair presentation have been included. The preparation of financial statements in conformity with
U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in
the financial statements and the accompanying notes. Actual results could differ from these
estimates. These unaudited condensed consolidated financial statements should be read in
conjunction with the Company’s audited consolidated financial statements and the notes thereto in
the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.
The Company has evaluated subsequent events through the date of issuance of the Unaudited
Condensed Consolidated Financial Statements.
Use of Estimates
The process of preparing DPS’ unaudited condensed consolidated financial statements in
conformity with U.S. GAAP requires the use of estimates and judgments that affect the reported
amounts of assets, liabilities, revenue, and expenses. These estimates and judgments are based on
historical experience, future expectations and other factors and assumptions the Company believes
to be reasonable under the circumstances. The most significant estimates and judgments are reviewed
on an ongoing basis and revised when necessary. Actual amounts may differ from these estimates and
judgments. The Company has identified the following policies as critical accounting policies:
| • | revenue recognition; |
| • | customer marketing programs and incentives; |
| • | goodwill and other indefinite lived intangibles; |
| • | definite lived intangible assets; |
| • | stock-based compensation; |
| • | pension and postretirement benefits; |
| • | risk management programs; and |
| • | income taxes. |
These accounting estimates and related policies are discussed in greater detail in DPS’ Annual
Report on Form 10-K for the year ended December 31, 2009.
4
Table of Contents
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Unaudited)
Recently Issued Accounting Updates
In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard
Update (“ASU”) No. 2010-06,
Improving Disclosures about Fair Value Measurements
(“ASU No.
2010-06”). The new standard addresses, among other things, guidance regarding activity in Level 3
fair value measurements. Portions of ASU No. 2010-06 that relate to the Level 3 activity
disclosures are effective for the annual reporting period beginning after December 15, 2010. The
Company will provide the required disclosures beginning with the Company’s Annual Report on Form
10-K for the year ending December 31, 2011. Based on the initial evaluation, the Company does not
anticipate a material impact to the Company’s financial position, results of operations or cash
flows as a result of this change.
Recently Adopted Provisions of U.S. GAAP
In accordance with U.S. GAAP, the following provisions, which had no material impact on the
Company’s financial position, results of operations or cash flows, were effective as of January 1,
2010.
| • | The application of certain key provisions of U.S. GAAP related to consolidation of variable interest entities, including guidance for determining whether an entity is a variable interest entity, ongoing assessments of control over such entities, and additional disclosures about an enterprise’s involvement in a variable interest entity. |
| • | The addition of certain fair value measurement disclosure requirements specific to the different classes of assets and liabilities, valuation techniques and inputs used, as well as transfers between level 1 and level 2. See Note 9 for further information. |
2. Inventories
Inventories as of March 31, 2010, and December 31, 2009, consisted of the following (in
millions):
| March 31, | December 31, | |||||||
| 2010 | 2009 | |||||||
|
Raw materials
|
$ | 97 | $ | 105 | ||||
|
Work in process
|
5 | 4 | ||||||
|
Finished goods
|
209 | 193 | ||||||
|
|
||||||||
|
Inventories at FIFO cost
|
311 | 302 | ||||||
|
Reduction to LIFO cost
|
(41 | ) | (40 | ) | ||||
|
|
||||||||
|
Inventories
|
$ | 270 | $ | 262 | ||||
|
|
||||||||
5
Table of Contents
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Unaudited)
3. Goodwill and Other Intangible Assets
Changes in the carrying amount of goodwill for the three months ended March 31, 2010, and the
year ended December 31, 2009, by reporting unit are as follows (in millions):
| WD | DSD | Latin | ||||||||||||||||||
| Beverage | Reporting | Reporting | America | |||||||||||||||||
| Concentrates | Unit (1) | Unit (1) | Beverages | Total | ||||||||||||||||
|
Balance as of December 31, 2008
|
||||||||||||||||||||
|
Goodwill
|
$ | 1,733 | $ | 1,220 | $ | 180 | $ | 30 | $ | 3,163 | ||||||||||
|
Accumulated impairment losses
|
— | — | (180 | ) | — | (180 | ) | |||||||||||||
|
|
||||||||||||||||||||
|
|
1,733 | 1,220 | — | 30 | 2,983 | |||||||||||||||
|
|
||||||||||||||||||||
|
Foreign currency impact
|
(1 | ) | — | — | 1 | — | ||||||||||||||
|
|
||||||||||||||||||||
|
Balance as of December 31, 2009
|
||||||||||||||||||||
|
Goodwill
|
1,732 | 1,220 | 180 | 31 | 3,163 | |||||||||||||||
|
Accumulated impairment losses
|
— | — | (180 | ) | — | (180 | ) | |||||||||||||
|
|
||||||||||||||||||||
|
|
1,732 | 1,220 | — | 31 | 2,983 | |||||||||||||||
|
|
||||||||||||||||||||
|
Foreign currency impact
|
(1 | ) | — | — | 2 | 1 | ||||||||||||||
|
|
||||||||||||||||||||
|
Balance as of March 31, 2010
|
||||||||||||||||||||
|
Goodwill
|
1,731 | 1,220 | 180 | 33 | 3,164 | |||||||||||||||
|
Accumulated impairment losses
|
— | — | (180 | ) | — | (180 | ) | |||||||||||||
|
|
||||||||||||||||||||
|
|
$ | 1,731 | $ | 1,220 | $ | — | $ | 33 | $ | 2,984 | ||||||||||
|
|
||||||||||||||||||||
| (1) | The Packaged Beverages segment is comprised of two reporting units, the Direct Store Delivery (“DSD”) system and the Warehouse Direct (“WD”) system. |
The net carrying amounts of intangible assets other than goodwill as of March 31, 2010, and
December 31, 2009, are as follows (in millions):
| March 31, 2010 | December 31, 2009 | |||||||||||||||||||||||
| Gross | Accumulated | Net | Gross | Accumulated | Net | |||||||||||||||||||
| Amount | Amortization | Amount | Amount | Amortization | Amount | |||||||||||||||||||
|
Intangible assets with indefinite
lives:
|
||||||||||||||||||||||||
|
Brands
(1)
|
$ | 2,656 | $ | — | $ | 2,656 | $ | 2,652 | $ | — | $ | 2,652 | ||||||||||||
|
Distributor rights
|
8 | — | 8 | 8 | — | 8 | ||||||||||||||||||
|
Intangible assets with finite lives:
|
||||||||||||||||||||||||
|
Brands
|
29 | (23 | ) | 6 | 29 | (22 | ) | 7 | ||||||||||||||||
|
Customer relationships
|
76 | (48 | ) | 28 | 76 | (45 | ) | 31 | ||||||||||||||||
|
Bottler agreements
|
21 | (17 | ) | 4 | 21 | (17 | ) | 4 | ||||||||||||||||
|
Distributor
rights
|
2 | (2 | ) | — | 2 | (2 | ) | — | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total
|
$ | 2,792 | $ | (90 | ) | $ | 2,702 | $ | 2,788 | $ | (86 | ) | $ | 2,702 | ||||||||||
|
|
||||||||||||||||||||||||
| (1) | Intangible brands with indefinite lives increased between December 31, 2009, and March 31, 2010, due to changes in foreign currency. |
As of March 31, 2010, the weighted average useful lives of intangible assets with finite lives
were 10 years, 8 years and 9 years for brands, customer relationships and bottler agreements,
respectively. Amortization expense for intangible assets was $4 million for each of the three
months ended March 31, 2010 and 2009.
6
Table of Contents
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Unaudited)
Amortization expense of these intangible assets over the remainder of 2010 and the next four
years is expected to be the following (in millions):
| Aggregate | ||||
| Amortization | ||||
| Year | Expense | |||
|
Remaining nine months for the year ending December 31, 2010
|
$ | 13 | ||
|
2011
|
8 | |||
|
2012
|
4 | |||
|
2013
|
4 | |||
|
2014
|
4 | |||
The Company conducts impairment tests on goodwill and all indefinite lived intangible assets
annually, as of December 31, or more frequently if circumstances indicate that the carrying amount
of an asset may not be recoverable. The Company uses present value and other valuation techniques
to make this assessment. If the carrying amount of goodwill exceeds its implied fair value or the
carrying amount of an intangible asset exceeds its fair value, an impairment loss is recognized in
an amount equal to that excess. DPS did not identify any circumstances that indicated that the
carrying amount of any goodwill or any indefinite lived intangible asset may not be recoverable
during the three months ended March 31, 2010.
4. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consisted of the following as of March 31, 2010, and
December 31, 2009 (in millions):
| March 31, | December 31, | |||||||
| 2010 | 2009 | |||||||
|
Trade accounts payable
|
$ | 289 | $ | 252 | ||||
|
Customer rebates and incentives
|
157 | 209 | ||||||
|
Accrued compensation
|
67 | 126 | ||||||
|
Insurance reserves
|
73 | 68 | ||||||
|
Interest accrual and interest rate swap liability
|
51 | 24 | ||||||
|
Other current liabilities
|
161 | 171 | ||||||
|
|
||||||||
|
Accounts payable and accrued expenses
|
$ | 798 | $ | 850 | ||||
|
|
||||||||
5. Long-term obligations
The following table summarizes the Company’s long-term obligations as of March 31, 2010, and
December 31, 2009 (in millions):
| March 31, | December 31, | |||||||
| 2010 | 2009 | |||||||
|
Senior unsecured notes
(1)
|
$ | 2,553 | $ | 2,542 | ||||
|
Revolving credit facility
|
— | 405 | ||||||
|
Less – current portion
|
— | — | ||||||
|
|
||||||||
|
Subtotal
|
2,553 | 2,947 | ||||||
|
Long-term capital lease obligations
|
13 | 13 | ||||||
|
|
||||||||
|
Long-term obligations
|
$ | 2,566 | $ | 2,960 | ||||
|
|
||||||||
| (1) | The carrying amount includes an adjustment of $4 million and $8 million related to the change in the fair value of interest rate swaps designated as fair value hedges on the 1.70% senior notes due in 2011 (the “2011 Notes”) and 2.35% senior notes due in 2012 (the “2012 Notes”) as of March 31, 2010 and December 31, 2009, respectively. Refer to Note 6 for further information regarding derivatives. |
7
Table of Contents
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Unaudited)
2010 Borrowings and Repayments
On November 20, 2009, the Company’s Board of Directors (the “Board”) authorized the Company to
issue up to $1,500 million of debt securities through the Securities and Exchange Commission shelf
registration process. At March 31, 2010, $650 million remained authorized to be issued following
the issuance described below.
During the first quarter of 2010, the Company repaid $405 million borrowed from the revolving
credit facility (the “Revolver”).
The following is a description of the Company’s senior unsecured credit facility and the senior unsecured notes. The
summaries of the senior unsecured credit facility and the senior unsecured notes are qualified in
their entirety by the specific terms and provisions of the senior unsecured credit facility
agreement (the “Facility Agreement”) and the indenture governing the senior unsecured notes,
respectively, copies of which have previously been filed, as referenced in the exhibits to the
Company’s Annual Report on Form 10-K for the year ended December 31, 2009.
Senior Unsecured Credit Facility
The Company’s senior unsecured credit facility originally provided senior unsecured financing
of up to $2,700 million, which consisted of:
| • | the senior unsecured Term Loan A facility (the “Term Loan A”) in an aggregate principal amount of $2,200 million with a term of five years, which was fully repaid in December 2009 prior to its maturity, and under which no further borrowings may be made; and |
| • | the Revolver in an aggregate principal amount of $500 million with a maturity in 2013. The balance of principal borrowings under the Revolver was $0 and $405 million as of March 31, 2010 and December 31, 2009, respectively. Up to $75 million of the Revolver is available for the issuance of letters of credit, of which $42 million and $41 million were utilized as of March 31, 2010, and December 31, 2009, respectively. Balances available for additional borrowings and letters of credit were $458 million and $33 million, respectively, as of March 31, 2010. |
Borrowings under the senior unsecured credit facility bear interest at a floating rate per
annum based upon the London interbank offered rate for dollars (“LIBOR”) or the alternate base rate
(“ABR”), in each case plus an applicable margin which varies based upon the Company’s debt ratings,
from 1.00% to 2.50%, in the case of LIBOR loans and 0.00% to 1.50% in the case of ABR loans. The
ABR means the greater of (a) JPMorgan Chase Bank’s prime rate and (b) the federal funds effective
rate plus one half of 1%. Interest is payable on the last day of the interest period, but
not less than quarterly, in the case of any LIBOR loan and on the last day of March, June,
September and December of each year in the case of any ABR loan. The average interest rate for the
three months ended March 31, 2010 and 2009, was 2.25% and 5.10%, respectively. Interest expense was
$2 million and $26 million for the three months ended March 31, 2010 and 2009, respectively.
Amortization of deferred financing costs of $1 million and $4 million for the three months ended
March 31, 2010 and 2009, respectively, was included in interest expense.
The Company utilized interest rate swaps to effectively convert variable interest rates to
fixed rates. Refer to Note 6 for further information regarding derivatives.
An unused commitment fee is payable quarterly to the lenders on the unused portion of the
commitments in respect of the Revolver equal to 0.15% to 0.50% per annum, depending upon the
Company’s debt ratings. Interest expense included $1 million of amortization of deferred financing
costs associated with the Revolver for each of the three months ended March 31, 2010 and 2009.
Principal amounts outstanding under the Revolver are due and payable in full at maturity.
All obligations under the senior unsecured credit facility are guaranteed by substantially all
of the Company’s existing and future direct and indirect domestic subsidiaries.
The Facility Agreement contains customary negative covenants that, among other things,
restrict the Company’s ability to incur debt at subsidiaries that are not guarantors; incur liens;
merge or sell, transfer, lease or otherwise dispose of all or substantially all assets; make
investments, loans, advances, guarantees and acquisitions; enter into transactions with affiliates;
and enter into agreements restricting its ability to incur liens or the ability of subsidiaries to
make distributions. These covenants are subject to certain exceptions described in the senior
Facility Agreement. In addition, the Facility Agreement requires the Company to comply with a
maximum total leverage ratio covenant and a minimum interest coverage ratio covenant. The Facility
Agreement also contains certain usual and customary representations and warranties, affirmative covenants and events
of default. As of March 31, 2010 and December 31, 2009, the Company was in compliance with all
financial covenant requirements.
8
Table of Contents
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Unaudited)
Senior Unsecured Notes
The 2011 and 2012 Notes
In December 2009, the Company completed the issuance of $850 million aggregate principal
amount of senior unsecured notes consisting of the 2011 and 2012 Notes. The weighted average
interest rate of the 2011 and 2012 Notes was 2.0% for the three months ended March 31, 2010. The
net proceeds from the sale of the debentures were used for repayment of existing indebtedness under
the Term Loan A. Interest on the 2011 and 2012 Notes is payable semi-annually on June 21 and
December 21. Interest expense was $2 million for the three months ended March 31, 2010.
The Company utilizes interest rate swaps designated as fair value hedges, to convert fixed
interest rates to variable rates. Refer to Note 6 for further information regarding derivatives.
The indenture governing the 2011 and 2012 Notes, among other things, limits the Company’s
ability to incur indebtedness secured by principal properties, to enter into certain sale and
leaseback transactions and to enter into certain mergers or transfers of substantially all of DPS’
assets. The 2011 and 2012 Notes are guaranteed by substantially all of the Company’s existing and
future direct and indirect domestic subsidiaries. As of March 31, 2010 and December 31, 2009, the
Company was in compliance with all covenant requirements.
The 2013, 2018 and 2038 Notes
During 2008, the Company completed the issuance of $1,700 million aggregate principal amount
of senior unsecured notes consisting of $250 million aggregate principal amount of 6.12% senior
notes due May 1, 2013 (the “2013 Notes”), $1,200 million aggregate principal amount of 6.82% senior
notes due May 1, 2018 (the “2018 Notes”), and $250 million aggregate principal amount of
7.45% senior notes due May 1, 2038 (the “2038 Notes”). The weighted average interest rate of the
2013, 2018 and 2038 Notes was 6.8% for both three month periods ended March 31, 2010 and 2009.
Interest on the senior unsecured notes is payable semi-annually on May 1 and November 1. Interest
expense was $29 million for each of the three months ended March 31, 2010 and 2009.
The indenture governing the senior unsecured notes, among other things, limits the Company’s
ability to incur indebtedness secured by principal properties, to enter into certain sale and lease
back transactions and to enter into certain mergers or transfers of substantially all of DPS’
assets. The senior unsecured notes are guaranteed by substantially all of the Company’s existing
and future direct and indirect domestic subsidiaries. As of March 31, 2010 and December 31, 2009,
the Company was in compliance with all covenant requirements.
Capital Lease Obligations
Long-term capital lease obligations totaled $13 million as of March 31, 2010, and December 31,
2009. Current obligations related to the Company’s capital leases were $3 million as of March 31,
2010, and December 31, 2009, and were included as a component of accounts payable and accrued
expenses.
6. Derivatives
DPS is exposed to market risks arising from adverse changes in:
| • | interest rates; |
| • | foreign exchange rates; and |
| • | commodity prices, affecting the cost of raw materials and fuels. |
The Company manages these risks through a variety of strategies, including the use of interest
rate swaps, foreign exchange forward contracts, commodity futures contracts and supplier pricing
agreements. DPS does not hold or issue derivative financial instruments for trading or speculative
purposes.
9
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DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Unaudited)
The Company formally designates and accounts for certain interest rate swaps and foreign
exchange forward contracts that meet established accounting criteria under U.S. GAAP as either fair
value or cash flow hedges. For derivative instruments that are designated and qualify as cash flow
hedges, the effective portion of the gain or loss on the derivative instruments is recorded, net of
applicable taxes, in Accumulated Other Comprehensive Loss (“AOCL”), a component of Stockholders’
Equity in the Unaudited Condensed Consolidated Balance Sheets. When net income is affected by the
variability of the underlying transaction, the applicable offsetting amount of the gain or loss
from the derivative instruments deferred in AOCL is reclassified to net income and is reported as a
component of the Unaudited Condensed Consolidated Statements of Operations. For derivative
instruments that are designated and qualify as fair value hedges, the effective change in the fair
value of these instruments, as well as the offsetting gain or loss on the hedged item attributable
to the hedged risk, are recognized immediately in current-period earnings. For derivatives that are
not designated or are de-designated as hedging instruments, the gain or loss on the instruments is
recognized in earnings in the period of change.
Certain interest rate swap agreements qualify for the “shortcut” method of accounting for
hedges under U.S. GAAP. Under the “shortcut” method, the hedges are assumed to be perfectly
effective and no ineffectiveness is recorded in earnings. For all other designated hedges, DPS
assesses hedge effectiveness and measures hedge ineffectiveness at least quarterly throughout the
designated period. Changes in the fair value of the derivative instruments that do not effectively
offset changes in the fair value of the underlying hedged item or the variability in the cash flows
of the forecasted transaction throughout the designated hedge period are recorded in earnings each
period.
If fair value or cash flow hedges were to cease to qualify for hedge accounting or were
terminated, it would continue to be carried on the balance sheet at fair value until settled, but
hedge accounting would be discontinued prospectively. If the underlying hedged transaction ceases
to exist, any associated amounts reported in AOCL are reclassified to earnings at that time.
Interest Rates
Cash Flow Hedges
During 2009, DPS utilized interest rate swaps to manage its exposure to volatility in floating
interest rates on borrowings under its Term Loan A. The intent of entering into these interest rate
swaps was to provide predictability in the Company’s overall cost structure by effectively
converting variable interest rates to fixed rates. During the three months ended March 31, 2009,
the Company effectively utilized interest rate swaps with a total notional amount of $1,700
million, entered into during 2008. In February 2009, the Company entered into an interest rate swap
effective December 31, 2009, with a duration of twelve months and a $750 million notional amount
that amortizes at the rate of $100 million every quarter and designated it as a cash flow hedge.
Upon repayment of the Term Loan A in December 2009, the Company de-designated the cash flow hedge.
See the Economic Hedge section within this note for further information.
During the three months ended March 31, 2009, the Company fully settled an interest rate swap
with a notional amount of $500 million.
There were no interest rate swaps in place for the three months ended March 31, 2010, that
qualified for hedge accounting as cash flow hedges under U.S. GAAP.
Fair Value Hedges
The Company is also exposed to the risk of changes in the fair value of certain fixed-rate
debt attributable to changes in interest rates and manages these risks through the use of
receive-fixed, pay-variable interest rate swaps.
There were no interest rate swaps in place for the three months ended March 31, 2009, that
qualified for hedge accounting as fair value hedges under U.S. GAAP.
In December 2009, the Company entered into interest rate swaps having an aggregate notional
amount of $850 million and durations ranging from two to three years in order to convert
fixed-rate, long-term debt to floating rate debt. These swaps were entered into at the inception of
the 2011 and 2012 Notes, were originally accounted for as fair value hedges under U.S. GAAP and
qualified for the “shortcut method” of accounting for hedges. Effective March 10, 2010, $225
million notional of the interest rate swap linked to the 2012 Notes was restructured to reflect a
change in the variable interest rate to be paid by the Company. This change triggered the
de-designation of the $225 million notional fair value hedge and the corresponding fair value
hedging relationship was discontinued. With the fair value hedge discontinued, the Company ceased
adjusting the carrying value of the 2012 Notes corresponding to the $225 million restructured notional
10
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DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Unaudited)
amounts. The $1 million adjustment of the carrying value of the
2012 Notes that resulted from de-designation will continue to be carried on the balance sheet and
amortized completely over the remaining term of the 2012 Notes. As a
result, the Company had fair
value hedges having an aggregate notional amount of $625 million as of March 31, 2010.
As of March 31, 2010, the carrying value of the 2011 and 2012 Notes increased by $4 million,
which includes the $1 million adjustment, net of amortization, that resulted from the
de-designation discussed above, to reflect the change in fair value of the Company’s interest rate
swap agreements. Refer to Note 5 for further information.
Economic Hedge
In addition to derivatives instruments that qualify for and are designated as hedging
instruments under U.S. GAAP, the Company utilizes interest rate swap instruments that are not
designated as cash flow or fair value hedges to manage interest rate risk.
As discussed above under Cash Flow Hedges, the interest rate swap entered into by the Company
and designated as a cash flow hedge under U.S GAAP in February 2009, was subsequently de-designated
with the full repayment of the Term Loan A in December 2009. The Company also terminated $345
million of the original notional amount of the interest rate swap in December 2009, leaving the
remaining $405 million in notional amount of the interest rate swap that had not been terminated as
an economic hedge during the first quarter of 2010. This remaining $405 million in notional amount
of the interest rate swap was used to economically hedge the volatility in the floating interest
rate associated with borrowings under the Revolver during the quarter. The Company terminated this
interest rate swap instrument once the outstanding balance under the Revolver was fully repaid. The
gain or loss on the instrument was recognized in earnings during the period the instrument was
outstanding.
As discussed above under Fair Value Hedges, effective March 10, 2010, $225 million notional of
the interest rate swap linked to the 2012 Notes was restructured to reflect a change in the
variable interest rate to be paid by the Company. This resulted in the de-designation of the $225
million notional fair value hedge and the discontinuance of the corresponding fair value hedging
relationship. The $225 million notional restructured interest rate swap was subsequently accounted
for as an economic hedge and the gain or loss on the instrument is recognized in earnings.
Foreign Exchange
The Company’s Canadian business purchases its inventory through transactions denominated and
settled in U.S. Dollars, a currency different from the functional currency of the Canadian
business. These inventory purchases are subject to exposure from movements in exchange rates.
During the three months ended March 31, 2010 and 2009, the Company utilized foreign exchange
forward contracts designated as cash flow hedges to manage the operational exposures resulting from
changes in these foreign currency exchange rates. The intent of these foreign exchange contracts is
to provide predictability in the Company’s overall cost structure. These foreign exchange
contracts, carried at fair value, have maturities between one and 21 months. As of March 31, 2010,
the Company had outstanding foreign exchange forward contracts with notional amounts of $73
million.
Commodities
DPS centrally manages the exposure to volatility in the prices of certain commodities used in
its production and distribution processes through futures contracts and supplier pricing agreements.
The intent of these contracts and agreements is to provide predictability in the Company’s overall
cost structure. During the three months ended March 31, 2010 and 2009, the Company entered into
futures contracts that economically hedge certain of its risks. In these cases, a natural hedging
relationship exists whereby changes in the fair value of the instruments act as an economic offset
to changes in the fair value of the underlying items. Changes in the fair value of these
instruments are recorded in net income throughout the term of the derivative instrument and are
reported in the same line item of the unaudited Condensed Consolidated Statements of Operations as
the hedged transaction. Gains and losses are recognized as a component of unallocated corporate
costs until the Company’s operating segments are affected by the settlement of the underlying
transaction, at which time the gain or loss is reflected as a component of the respective segment’s
operating profit (“SOP”).
11
Table of Contents
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Unaudited)
The following table summarizes the location of the fair value of the Company’s derivative
instruments within the unaudited Condensed Consolidated Balance Sheets as of March 31, 2010, and
December 31, 2009 (in millions):
| March 31, | December 31, | |||||||||
| Balance Sheet Location | 2010 | 2009 | ||||||||
|
Assets:
|
||||||||||
|
Derivative instruments designated as
hedging instruments under U.S.
GAAP: |
||||||||||
|
Interest rate swap contracts
|
Prepaid expenses and other current assets | $ | 6 | $ | 6 | |||||
|
Foreign exchange forward contracts
|
Other non-current assets | — | — | |||||||
|
Derivative instruments not designated
as hedging
instruments under U.S. GAAP:
|
||||||||||
|
Commodity futures
|
Prepaid expenses and other current assets | 4 | 1 | |||||||
|
Interest rate swap contracts
|
Prepaid expenses and other current assets | 3 | — | |||||||
|
Commodity futures
|
Other non-current assets | 7 | 9 | |||||||
|
|
||||||||||
|
Total assets
|
$ | 20 | $ | 16 | ||||||
|
|
||||||||||
|
|
||||||||||
|
Liabilities:
|
||||||||||
|
Derivative instruments designated as
hedging
instruments under U.S. GAAP:
|
||||||||||
|
Foreign exchange forward contracts
|
Accounts payable and accrued expenses | $ | 2 | $ | 2 | |||||
|
Interest rate swap contracts
|
Other non-current liabilities | 3 | 14 | |||||||
|
Foreign exchange forward contracts
|
Other non-current liabilities | — | — | |||||||
|
Derivative instruments not designated as
hedging
instruments under U.S. GAAP:
|
||||||||||
|
Interest rate swap contract
|
Accounts payable and accrued expenses | — | 3 | |||||||
|
Commodity futures
|
Accounts payable and accrued expenses | 2 | — | |||||||
|
Interest rate swap contract
|
Other non-current liabilities | 2 | — | |||||||
|
Commodity futures
|
Other non-current liabilities | 1 | — | |||||||
|
|
||||||||||
|
Total liabilities
|
$ | 10 | $ | 19 | ||||||
|
|
||||||||||
The following table presents the impact of derivative instruments designated as cash flow
hedging instruments under U.S. GAAP to the unaudited Condensed Consolidated Statement of Operations
and Other Comprehensive Income (“OCI”) for the three months ended March 31, 2010 and 2009 (in
millions):
| Amount of Gain | Amount of Gain (Loss) | Location of Gain (Loss) | ||||||||
| (Loss) Recognized in | Reclassified from AOCL into | Reclassified from AOCL into | ||||||||
| OCI | Net Income | Net Income | ||||||||
|
For the three months ended
March 31, 2010:
|
||||||||||
|
Foreign exchange forward contract
|
$ | (2 | ) | $ | (2 | ) | Cost of sales | |||
|
|
||||||||||
|
Total
|
$ | (2 | ) | $ | (2 | ) | ||||
|
|
||||||||||
|
|
||||||||||
|
For the three months ended
March 31, 2009:
|
||||||||||
|
Interest rate swap contracts
|
$ | (6 | ) | $ | (11 | ) | Interest expense | |||
|
Foreign exchange forward contract
|
— | — | Cost of sales | |||||||
|
|
||||||||||
|
Total
|
$ | (6 | ) | $ | (11 | ) | ||||
|
|
||||||||||
There was no hedge ineffectiveness recognized in net income for the three months ended March
31, 2010 and 2009. During the next 12 months, the Company expects to reclassify net losses of $2
million from AOCL into net income.
The interest rate swap agreements designated as fair value hedges qualify for the “shortcut”
method and no ineffectiveness is recorded in earnings for the three months ended March 31, 2010.
12
Table of Contents
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Unaudited)
The following table presents the impact of derivative instruments not designated as hedging
instruments under U.S. GAAP to the unaudited Condensed Consolidated Statement of Operations for the
three months ended March 31, 2010 and 2009 (in millions):
| Amount of Gain (Loss) | Location of Gain (Loss) | |||||
| Recognized in Income | Recognized in Income | |||||
|
For the three months ended
March 31, 2010:
|
||||||
|
Interest rate swap contracts
|
$ | — | Interest expense | |||
|
Commodity futures
|
(2 | ) | Cost of sales | |||
|
Commodity futures
|
1 | Selling, general and administrative expenses | ||||
|
|
||||||
|
Total
(1)
|
$ | (1 | ) | |||
|
|
||||||
|
|
||||||
|
For the three months ended
March 31, 2009:
|
||||||
|
Commodity futures
|
$ | (3 | ) | Cost of sales | ||
|
Commodity futures
|
(3 | ) | Selling, general and administrative expenses | |||
|
|
||||||
|
Total
(2)
|
$ | (6 | ) | |||
|
|
||||||
| (1) | The total loss recognized under commodity futures contracts for the three months ended March 31, 2010, represents an unrealized $1 million loss which represents the change in fair value of outstanding commodity futures contracts during the period. | |
| (2) | The total gain recognized under commodity futures contracts for the three months ended March 31, 2009, includes a realized $7 million loss which represents commodity contracts that settled during the three months ended March 31, 2009, and an unrealized $1 million gain which represents the change in fair value of outstanding commodity futures contracts during the period. |
Refer to Note 9 for more information on the valuation of derivative instruments. The Company
has exposure to credit losses from derivative instruments in an asset position in the event of
nonperformance by the counterparties to the agreements. Historically, DPS has not experienced
credit losses as a result of counterparty nonperformance. The Company selects and periodically
reviews counterparties based on credit ratings, limits its exposure to a single counterparty under
defined guidelines, and monitors the market position of the programs at least on a quarterly basis.
7. Other Non-Current Assets and Other Non-Current Liabilities
The table below details the components of other non-current assets and other non-current
liabilities as of March 31, 2010, and December 31, 2009 (in millions):
| March 31, | December 31, | |||||||
| 2010 | 2009 | |||||||
|
Other non-current assets:
|
||||||||
|
Long-term receivables from Kraft
(1)
|
$ | 405 | $ | 402 | ||||
|
Deferred financing costs, net
|
21 | 23 | ||||||
|
Customer incentive programs
|
82 | 84 | ||||||
|
Other
|
35 | 34 | ||||||
|
|
||||||||
|
Other non-current assets
|
$ | 543 | $ | 543 | ||||
|
|
||||||||
|
Other non-current liabilities:
|
||||||||
|
Long-term payables due to Kraft
(1)
|
$ | 120 | $ | 115 | ||||
|
Liabilities for unrecognized tax benefits and other tax related items
|
543 | 534 | ||||||
|
Long-term pension and postretirement liability
|
46 | 49 | ||||||
|
Other
|
27 | 39 | ||||||
|
|
||||||||
|
Other non-current liabilities
|
$ | 736 | $ | 737 | ||||
|
|
||||||||
| (1) | Amounts represent receivables from or payables to Kraft under the Tax Indemnity Agreement entered into in connection with the Company’s separation. |
13
Table of Contents
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Unaudited)
8. Income Taxes
The effective tax rates for the three months ended March 31, 2010 and 2009 were 43.3% and
38.3%, respectively. The increase in the effective tax rate for the three months ended March 31,
2010, was primarily driven by a previous change in the provincial income tax rate for Ontario,
Canada, which caused a writedown of a deferred tax asset, partially offset by foreign tax planning
benefits. The impact of the change in tax rate increased the provision for income taxes and
effective tax rate by $13 million and 8.3%, respectively for the three months ended March 31, 2010.
The Company’s Canadian deferred tax assets as of March 31, 2010, of which approximately 66%
are allocated to Ontario, Canada, included a separation related balance of $138 million that was
offset by a liability due to Kraft of $124 million driven by the Tax Indemnity Agreement.
Anticipated legislation in Canada could result in a future partial writedown of these tax assets
which would be offset to some extent by a partial write down of the liability due to Kraft.
Under the Tax Indemnity Agreement, Kraft will indemnify DPS for net unrecognized tax benefits
and other tax related items of $405 million. This balance increased by $3 million during the three
months ended March 31, 2010, and was offset by indemnity income recorded as a component of other
income in the unaudited Condensed Consolidated Statement of Operations. In addition, pursuant to
the terms of the Tax Indemnity Agreement, if DPS breaches certain covenants or other obligations or
DPS is involved in certain change-in-control transactions, Kraft may not be required to indemnify
the Company.
9. Fair Value
Under U.S. GAAP, fair value is defined as the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market participants at the
measurement date. U.S. GAAP provides a framework for measuring fair value and establishes a
three-level hierarchy for fair value measurements based upon the transparency of inputs to the
valuation of an asset or liability. The three-level hierarchy for disclosure of fair value
measurements is as follows:
Level 1
— Quoted market prices in active markets for identical assets or liabilities.
Level 2
— Observable inputs such as quoted prices for similar assets or liabilities in active
markets; quoted prices for identical or similar assets or liabilities in markets that are not
active; and model-derived valuations in which all significant inputs and significant value
drivers are observable in active markets.
Level 3
— Valuations with one or more unobservable significant inputs that reflect the
reporting entity’s own assumptions.
The following table presents the fair value hierarchy for those assets and liabilities
measured at fair value on a recurring basis as of March 31, 2010 (in millions):
| Fair Value Measurements at Reporting Date Using | ||||||||||||
| Quoted Prices in | Significant Other | Significant | ||||||||||
| Active Markets for | Observable | Unobservable | ||||||||||
| Identical Assets | Inputs | Inputs | ||||||||||
| Level 1 | Level 2 | Level 3 | ||||||||||
|
Cash and cash equivalents
|
$ | 571 | $ | — | $ | — | ||||||
|
Commodity futures
|
— | 11 | — | |||||||||
|
Interest rate swaps
|
— | 9 | — | |||||||||
|
|
||||||||||||
|
Total assets
|
$ | 571 | $ | 20 | $ | — | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Commodity futures
|
$ | — | $ | 3 | $ | — | ||||||
|
Interest rate swaps
|
— | 5 | — | |||||||||
|
Foreign exchange forward contracts
|
— | 2 | — | |||||||||
|
|
||||||||||||
|
Total liabilities
|
$ | — | $ | 10 | $ | — | ||||||
|
|
||||||||||||
14
Table of Contents
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Unaudited)
The following table presents the fair value hierarchy for those assets and liabilities
measured at fair value on a recurring basis as of December 31, 2009 (in millions):
| Fair Value Measurements at Reporting Date Using | ||||||||||||
| Quoted Prices in | Significant Other | Significant | ||||||||||
| Active Markets for | Observable | Unobservable | ||||||||||
| Identical Assets | Inputs | Inputs | ||||||||||
| Level 1 | Level 2 | Level 3 | ||||||||||
|
Cash and cash equivalents
|
$ | 280 | $ | — | $ | — | ||||||
|
Commodity futures
|
— | 10 | — | |||||||||
|
Interest rate swaps
|
— | 6 | — | |||||||||
|
|
||||||||||||
|
Total assets
|
$ | 280 | $ | 16 | $ | — | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Interest rate swaps
|
$ | — | $ | 17 | $ | — | ||||||
|
Foreign exchange forward contracts
|
— | 2 | — | |||||||||
|
|
||||||||||||
|
Total liabilities
|
$ | — | $ | 19 | $ | — | ||||||
|
|
||||||||||||
The fair values of commodity futures contracts, interest rate swap contracts and foreign
currency forward contracts are determined based on inputs that are readily available in public
markets or can be derived from information available in publicly quoted markets. The fair value
of commodity futures contracts are valued using the market approach based on observable market
transactions at the reporting date. Interest rate swap contracts are valued using models based on
readily observable market parameters for all substantial terms of our contracts. The fair value of
foreign currency forward contracts are valued using quoted forward foreign exchange prices at the
reporting date. Therefore, the Company has categorized these contracts as Level 2.
As of March 31, 2010, and December 31, 2009, we did not have any assets or liabilities without
observable market values that would require a high level of judgment to determine fair value (level
3).
There were no transfers of financial instruments between the three levels of fair value
hierarchy during the three months ended March 31, 2010.
The estimated fair values of other financial liabilities not measured at fair value on a
recurring basis at March 31, 2010, and December 31, 2009, are as follows (in millions):
| March 31, 2010 | December 31, 2009 | |||||||||||||||
| Carrying Amount | Fair Value | Carrying Amount | Fair Value | |||||||||||||
|
Long term debt – 2011 Notes
|
$ | 401 | $ | 400 | $ | 396 | $ | 400 | ||||||||
|
Long term debt – 2012 Notes
|
452 | 450 | 446 | 451 | ||||||||||||
|
Long term debt – 2013 Notes
|
250 | 277 | 250 | 273 | ||||||||||||
|
Long term debt – 2018 Notes
|
1,200 | 1,359 | 1,200 | 1,349 | ||||||||||||
|
Long term debt – 2038 Notes
|
250 | 294 | 250 | 291 | ||||||||||||
|
Long term debt – Revolving credit facility
|
— | — | 405 | 405 | ||||||||||||
Capital leases have been excluded from the calculation of fair value for both 2010 and 2009.
The fair value amounts for cash and cash equivalents, accounts receivable, net and accounts
payable and accrued expenses approximate carrying amounts due to the short maturities of these
instruments. The fair value amounts of long term debt as of March 31, 2010, and December 31, 2009,
were estimated based on quoted market prices for traded securities. The difference between the fair
value and the carrying value represents the theoretical net premium or discount that would be paid
or received to retire all debt at such date.
15
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DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Unaudited)
10. Employee Benefit Plans
The following table sets forth the components of pension benefit costs for the three months
ended March 31, 2010 and 2009 (in millions):
| For the Three Months | ||||||||
| Ended March 31, | ||||||||
| 2010 | 2009 | |||||||
|
Service cost
|
$ | — | $ | — | ||||
|
Interest cost
|
4 | 4 | ||||||
|
Expected return on assets
|
(4 | ) | (3 | ) | ||||
|
Recognition of actuarial loss
|
1 | 1 | ||||||
|
|
||||||||
|
Net periodic benefit costs
|
$ | 1 | $ | 2 | ||||
|
|
||||||||
Total net periodic benefit costs for the U.S. postretirement benefit plans were not
significant for either of the three month periods ended March 31, 2010 or 2009. The estimated prior
service cost, transitional obligation and estimated net loss that will be amortized from AOCL into
periodic benefit cost for postretirement plans in 2010 are not significant.
The Company contributed $3 million to its pension plans during the three months ended March
31, 2010, and expects to contribute an additional $9 million to these plans during the remainder of
2010.
The Company also contributes to various multi-employer pension plans based on obligations
arising from certain of its collective bargaining agreements. The Company recognizes expense in
connection with these plans as contributions are funded. Contributions paid into multi-employer
defined benefit pension plans for employees under collective bargaining agreements were
approximately $1 million for each of the three month periods ended March 31, 2010 and 2009.
11. Stock-Based Compensation
The Company’s Omnibus Stock Incentive Plans of 2008 and 2009 (collectively, the “DPS Stock
Plans”) provide for various long-term incentive awards, including stock options and restricted
stock units (“RSUs”).
The components of stock-based compensation expense for the three months ended March 31, 2010
and 2009 are presented below (in millions). Stock-based compensation expense is recorded in
selling, general and administrative expenses in the unaudited Condensed Consolidated Statement of
Operations.
| For the Three Months | ||||||||
| Ended March 31, | ||||||||
| 2010 | 2009 | |||||||
|
Total stock-based compensation expense
|
$ | 6 | $ | 3 | ||||
|
Income tax benefit recognized in the income statement
|
(2 | ) | (1 | ) | ||||
|
|
||||||||
|
Net stock-based compensation expense
|
$ | 4 | $ | 2 | ||||
|
|
||||||||
The table below summarizes stock option activity for the three months ended March 31, 2010.
| Weighted | Weighted Average | Aggregate | ||||||||||||||
| Average | Remaining Contractual | Intrinsic Value | ||||||||||||||
| Stock Options | Exercise Price | Term (Years) | (in millions) | |||||||||||||
|
Outstanding at December 31, 2009
|
2,178,211 | $ | 18.97 | 8.79 | $ | 20 | ||||||||||
|
Granted
|
670,368 | 31.50 | ||||||||||||||
|
Exercised
|
(65,868 | ) | 17.08 | |||||||||||||
|
Forfeited or expired
|
— | — | ||||||||||||||
|
|
||||||||||||||||
|
Outstanding at March 31, 2010
|
2,782,711 | 22.04 | 8.85 | 37 | ||||||||||||
|
|
||||||||||||||||
|
Exercisable at March 31, 2010
|
660,247 | $ | 19.16 | 8.53 | $ | 11 | ||||||||||
|
|
||||||||||||||||
16
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DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Unaudited)
As of March 31, 2010, there was $10 million of unrecognized compensation cost related to the
nonvested stock options granted under the DPS Stock Plans that is expected to be recognized over a
weighted average period of 2.15 years.
The table below summarizes RSU activity for the three months ended March 31, 2010.
| Weighted | Weighted Average | Aggregate | ||||||||||||||
| Average Grant | Remaining Contractual | Intrinsic Value | ||||||||||||||
| RSUs | Date Fair Value | Term (Years) | (in millions) | |||||||||||||
|
Outstanding at December 31, 2009
|
2,688,551 | $ | 17.43 | 1.91 | $ | 76 | ||||||||||
|
Granted
|
873,476 | 31.50 | ||||||||||||||
|
Dividend equivalent
units
(1)
|
13,969 | 28.87 | ||||||||||||||
|
Vested
|
(15,392 | ) | 20.14 | |||||||||||||
|
Forfeited or expired
|
(13,513 | ) | 16.55 | |||||||||||||
|
|
||||||||||||||||
|
Outstanding at March 31, 2010
|
3,547,091 | $ | 20.90 | 2.30 | $ | 125 | ||||||||||
|
|
||||||||||||||||
| (1) | Under the terms of the Company’s RSU agreements, unvested RSU awards, as well as dividend equivalents, are forfeitable. These forfeitable dividend equivalent units on nonvested stock awards are accrued in the form of additional restricted stock units. |
As of March 31, 2010, there was $53 million of unrecognized compensation cost related to the
nonvested RSUs granted under the DPS Stock Plans that is expected to be recognized over a weighted
average period of 2.30 years.
12. Earnings Per Share
Basic earnings per share (“EPS”) is computed by dividing net income by the weighted average
number of common shares outstanding for the period. Diluted EPS reflects the assumed conversion of
all dilutive securities. The following table sets forth the computation of basic EPS utilizing the
net income for the respective period and the Company’s basic shares outstanding and presents the
computation of diluted EPS (in millions, except per share data):
| For the Three Months | ||||||||
| Ended March 31, | ||||||||
| 2010 | 2009 | |||||||
|
Basic EPS:
|
||||||||
|
Net income
|
$ | 89 | $ | 132 | ||||
|
Weighted average common shares outstanding
|
253.3 | 254.2 | ||||||
|
Earnings per common share — basic
|
$ | 0.35 | $ | 0.52 | ||||
|
|
||||||||
|
Diluted EPS:
|
||||||||
|
Net income
|
$ | 89 | $ | 132 | ||||
|
Weighted average common shares outstanding
|
253.3 | 254.2 | ||||||
|
Effect of dilutive securities:
|
||||||||
|
Stock options, RSUs, and dividend equivalent units
|
1.8 | 0.1 | ||||||
|
|
||||||||
|
Weighted average common shares outstanding and common
stock equivalents
|
255.1 | 254.3 | ||||||
|
|
||||||||
|
|
||||||||
|
Earnings per common share — diluted
|
$ | 0.35 | $ | 0.52 | ||||
Stock options, RSUs and dividend equivalent units totaling 0.5 million shares were excluded
from the diluted weighted average shares outstanding for the three months ended March 31, 2010 as
they were not dilutive. Weighted average options and RSUs totaling 2.4 million shares were excluded
from the diluted weighted average shares outstanding for the three months ended March 31, 2009 as
they were not dilutive. Under the terms of our RSU agreements, unvested RSU awards contain
forfeitable rights to dividends and dividend equivalent units. Because the dividend equivalent
units are forfeitable, they are defined as non-participating securities.
On
February 24, 2010, the Board approved an increase in the total aggregate share repurchase
authorization up to $1 billion. Subsequent to this approval, the Company repurchased
and retired 5.8 million shares of common stock valued at approximately $202 million in the three
months ended March 31, 2010. These amounts were recorded as a reduction of equity, primarily
additional paid-in capital.
17
Table of Contents
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Unaudited)
13. Commitments and Contingencies
Legal Matters
The Company is occasionally subject to litigation or other legal proceedings as set forth
below. The Company does not believe that the outcome of these, or any other, pending legal matters,
individually or collectively, will have a material adverse effect on the business or financial
condition of the Company, although such matters may have a material adverse effect on the Company’s
results of operations or cash flows in a particular period.
Snapple Litigation – Labeling Claims
Snapple Beverage Corp. has been sued in various jurisdictions generally alleging that
Snapple’s labeling of certain of its drinks is misleading and/or deceptive. These cases have been
filed as class actions and, generally, seek unspecified damages on behalf of the class, including
enjoining Snapple from various labeling practices, disgorging profits, reimbursing of monies paid
for product and treble damages. The cases and their status are as follows:
| • | In 2007, Snapple Beverage Corp. was sued by Stacy Holk in New Jersey Superior Court, Monmouth County. Subsequent to filing, the Holk case was removed to the United States District Court, District of New Jersey. Snapple filed a motion to dismiss the Holk case on a variety of grounds. In June 2008, the district court granted Snapple’s motion to dismiss. The plaintiff appealed and in August 2009, the appellate court reversed the judgment and remanded to the district court for further proceedings. |
| • | In 2007, the attorneys in the Holk case also filed a new action in the United States District Court, Southern District of New York on behalf of plaintiffs, Evan Weiner and Timothy McCausland. This case was stayed during the pendency of the Holk motion to dismiss and appeal. This stay is now lifted, the Company filed its answer and the case is proceeding. |
| • | In April 2009, Snapple Beverage Corp. was sued by Frances Von Koenig in the United States District Court, Eastern District of California. A motion to dismiss has been filed in the Von Koenig case. |
| • | In August 2009, Guy Cadwell filed suit against Dr Pepper Snapple Group, Inc. in the United States District Court, Southern District of California. This case has been transferred to the United States District Court, Eastern District of California and has been consolidated by that court with the Von Koenig case. |
The Company believes it has meritorious defenses to the claims asserted in each of these cases
and will defend itself vigorously. However, there is no assurance that the outcome of these cases
will be favorable to the Company.
Nicolas Steele v. Seven Up/RC Bottling Company Inc.
Robert Jones v. Seven Up/RC Bottling Company of Southern California, Inc.
California Wage Audit
Robert Jones v. Seven Up/RC Bottling Company of Southern California, Inc.
California Wage Audit
In 2007, one of the Company’s subsidiaries, Seven Up/RC Bottling Company Inc., was sued by
Robert Jones in the Superior Court in the State of California (Orange County), alleging that its
subsidiary failed to provide meal and rest periods and itemized wage statements in accordance with
applicable California wage and hour law. The case was filed as a class action. The class, which has
not yet been certified, consists of employees who have held delivery driver positions in California
in the past three years. The potential class size could be substantially higher due to the number
of individuals who have held these positions over the three year period. On behalf of the class,
the plaintiffs claim lost wages, waiting time penalties and other penalties for each violation of
the statute. The Company believes it has meritorious defenses to the claims asserted and will
defend itself vigorously. However, there is no assurance that the outcome of this matter will be in
its favor. A case filed by Nicolas Steele, et al. in the same court based on similar facts and
causes of action, but involving merchandisers, has been settled for an amount that is not material
to the Company.
The Company has been requested to conduct an audit of its meal and rest periods for all
non-exempt employees in California at the direction of the California Department of Labor. At this
time, the Company has declined to conduct such an audit until there is judicial clarification of
the intent of the statute. The Company cannot predict the outcome of such an audit.
18
Table of Contents
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Unaudited)
Environmental, Health and Safety Matters
The Company operates many manufacturing, bottling and distribution facilities. In these and
other aspects of the Company’s business, it is subject to a variety of federal, state and local
environment, health and safety laws and regulations. The Company maintains environmental, health
and safety policies and a quality, environmental, health and safety program designed to ensure
compliance with applicable laws and regulations. However, the nature of the Company’s business
exposes it to the risk of claims with respect to environmental, health and safety matters, and
there can be no assurance that material costs or liabilities will not be incurred in connection
with such claims.
The federal Comprehensive Environmental Response, Compensation and Liability Act of 1980
(CERCLA), also known as the Superfund law, as well as similar state laws, generally impose joint
and several liability for cleanup and enforcement costs on current and former owners and operators
of a site without regard to fault of the legality of the original conduct. In October 2008, DPS was
notified by the Environmental Protection Agency that it is a potentially responsible party for
study and cleanup costs at a Superfund site in New Jersey. Investigation and remediation costs are
yet to be determined, but the Company has reasonably estimated that DPS’ allocation of costs
related to the study for this site will not exceed $250,000.
14. Comprehensive Income
The following table provides a summary of the total comprehensive income, including our
proportionate share of equity method investees’ other comprehensive income, for the three months
ended March 31, 2010 and 2009 (in millions):
| For the | ||||||||
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2010 | 2009 | |||||||
|
Consolidated net income
|
$ | 89 | $ | 132 | ||||
|
Other comprehensive income:
|
||||||||
|
Net foreign currency translation gain (loss)
|
17 | (9 | ) | |||||
|
Net change in pension liability
|
1 | — | ||||||
|
Cash flow hedge gain
|
— | 3 | ||||||
|
|
||||||||
|
Total comprehensive income
|
$ | 107 | $ | 126 | ||||
|
|
||||||||
15. Segments
As of March 31, 2010, the Company’s operating structure consisted of the following three
operating segments:
| • | The Beverage Concentrates segment reflects sales of the Company’s branded concentrates and syrup to third party bottlers primarily in the United States and Canada. Most of the brands in this segment are carbonated soft drink (“CSD”) brands. |
| • | The Packaged Beverages segment reflects sales in the United States 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 Latin America Beverages segment reflects sales in the Mexico and Caribbean markets from the manufacture and distribution of both concentrates and finished beverages. |
Segment results are based on management reports. Net sales and SOP are the significant
financial measures used to assess the operating performance of the Company’s operating segments.
19
Table of Contents
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Unaudited)
Information about the Company’s operations by operating segment for the three months ended
March 31, 2010 and 2009 is as follows (in millions):
| For the | ||||||||
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2010 | 2009 | |||||||
|
Segment Results – Net Sales
|
||||||||
|
Beverage Concentrates
|
$ | 240 | $ | 243 | ||||
|
Packaged Beverages
|
929 | 944 | ||||||
|
Latin America Beverages
|
79 | 73 | ||||||
|
|
||||||||
|
Net sales
|
$ | 1,248 | $ | 1,260 | ||||
|
|
||||||||
| For the | ||||||||
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2010 | 2009 | |||||||
|
Segment Results – SOP
|
||||||||
|
Beverage Concentrates
|
$ | 146 | $ | 150 | ||||
|
Packaged Beverages
|
114 | 107 | ||||||
|
Latin America Beverages
|
7 | 9 | ||||||
|
|
||||||||
|
Total SOP
|
267 | 266 | ||||||
|
Unallocated corporate costs
|
77 | 63 | ||||||
|
Other operating expense (income), net
|
3 | (62 | ) | |||||
|
|
||||||||
|
Income from operations
|
187 | 265 | ||||||
|
Interest expense, net
|
33 | 54 | ||||||
|
Other income, net
|
(3 | ) | (3 | ) | ||||
|
|
||||||||
|
Income before provision for income taxes
and equity in earnings of unconsolidated
subsidiaries
|
$ | 157 | $ | 214 | ||||
|
|
||||||||
16. Agreement with PepsiCo, Inc.
On February 26, 2010, the Company completed the licensing of certain brands to PepsiCo, Inc.
(“PepsiCo”) following PepsiCo’s acquisitions of The Pepsi Bottling Group, Inc. (“PBG”) and
PepsiAmericas, Inc. (“PAS”).
Under the new licensing agreements, PepsiCo began distributing Dr Pepper, Crush and Schweppes
in the U.S. territories where these brands were previously being distributed by PBG and PAS. The
same applies to Dr Pepper, Crush, Schweppes, Vernors and Sussex in Canada; and Squirt and Canada
Dry in Mexico.
Under the new agreements, DPS received a one-time nonrefundable cash payment of $900 million.
The new agreements have an initial period of twenty years with automatic twenty year renewal
periods, and require PepsiCo to meet certain performance conditions. The payment was recorded as
deferred revenue, which will be recognized as net sales ratably over the estimated 25-year life of
the customer relationship.
Additionally,
in U.S. territories where it has a distribution footprint, DPS has
begun
selling certain owned and licensed brands, including Sunkist soda, Squirt, Vernors and Hawaiian
Punch, that were previously distributed by PBG and PAS.
17. Guarantor and Non-Guarantor Financial Information
The Company’s 2011, 2012, 2013, 2018 and 2038 Notes (collectively, the “Notes”) are fully and
unconditionally guaranteed by substantially all of the Company’s existing and future direct and
indirect domestic subsidiaries (except two immaterial subsidiaries associated with the Company’s
charitable foundations) (the “Guarantors”), as defined in the indenture governing the Notes. The
Guarantors are wholly-owned either directly or indirectly by the Company and jointly and severally
guarantee the Company’s obligations under the Notes. None of the Company’s subsidiaries organized outside of the
United States guarantee the Notes (collectively, the “Non-Guarantors”).
20
Table of Contents
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Unaudited)
The
following schedules present the financial information for the three
months ended March 31, 2010 and 2009, and as of March 31, 2010 and
December 31, 2009, for Dr Pepper Snapple Group, Inc. (the
“Parent”), Guarantors and Non-Guarantors. The consolidating
schedules are provided in accordance with the reporting requirements
for guarantor subsidiaries.
| Condensed Consolidating Statements of Operations | ||||||||||||||||||||
| For the Three Months Ended March 31, 2010 | ||||||||||||||||||||
| Parent | Guarantors | Non-Guarantors | Eliminations | Total | ||||||||||||||||
| (in millions) | ||||||||||||||||||||
|
Net sales
|
$ | — | $ | 1,139 | $ | 109 | $ | — | $ | 1,248 | ||||||||||
|
Cost of sales
|
— | 447 | 49 | — | 496 | |||||||||||||||
|
|
||||||||||||||||||||
|
Gross profit
|
— | 692 | 60 | — | 752 | |||||||||||||||
|
Selling, general and administrative
expenses
|
— | 486 | 45 | — | 531 | |||||||||||||||
|
Depreciation and amortization
|
— | 30 | 1 | — | 31 | |||||||||||||||
|
Other operating expense (income), net
|
— | 3 | — | — | 3 | |||||||||||||||
|
|
||||||||||||||||||||
|
Income from operations
|
— | 173 | 14 | — | 187 | |||||||||||||||
|
Interest expense
|
34 | 20 | — | (20 | ) | 34 | ||||||||||||||
|
Interest income
|
(19 | ) | (1 | ) | (1 | ) | 20 | (1 | ) | |||||||||||
|
Other income, net
|
(3 | ) | (4 | ) | 4 | — | (3 | ) | ||||||||||||
|
|
||||||||||||||||||||
|
Income before provision for
income taxes and equity in
earnings of subsidiaries
|
(12 | ) | 158 | 11 | — | 157 | ||||||||||||||
|
Provision for income taxes
|
(6 | ) | 63 | 11 | — | 68 | ||||||||||||||
|
|
||||||||||||||||||||
|
Income before equity in earnings
of subsidiaries
|
(6 | ) | 95 | — | — | 89 | ||||||||||||||
|
Equity in earnings of consolidated
subsidiaries
|
95 | — | — | (95 | ) | — | ||||||||||||||
|
Equity in earnings of unconsolidated
subsidiaries, net of tax
|
— | — | — | — | — | |||||||||||||||
|
|
||||||||||||||||||||
|
Net income
|
$ | 89 | $ | 95 | $ | — | $ | (95 | ) | $ | 89 | |||||||||
|
|
||||||||||||||||||||
21
Table of Contents
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Unaudited)
| Condensed Consolidating Statements of Operations | ||||||||||||||||||||
| For the Three Months Ended March 31, 2009 | ||||||||||||||||||||
| Parent | Guarantors | Non-Guarantors | Eliminations | Total | ||||||||||||||||
| (in millions) | ||||||||||||||||||||
|
Net sales
|
$ | — | $ | 1,165 | $ | 95 | $ | — | $ | 1,260 | ||||||||||
|
Cost of sales
|
— | 489 | 42 | — | 531 | |||||||||||||||
|
|
||||||||||||||||||||
|
Gross profit
|
— | 676 | 53 | — | 729 | |||||||||||||||
|
Selling, general and administrative
expenses
|
— | 464 | 35 | — | 499 | |||||||||||||||
|
Depreciation and amortization
|
— | 25 | 2 | — | 27 | |||||||||||||||
|
Other operating income
|
— | (57 | ) | (5 | ) | — | (62 | ) | ||||||||||||
|
|
||||||||||||||||||||
|
Income from operations
|
— | 244 | 21 | — | 265 | |||||||||||||||
|
Interest expense
|
55 | 39 | — | (39 | ) | 55 | ||||||||||||||
|
Interest income
|
(39 | ) | — | (1 | ) | 39 | (1 | ) | ||||||||||||
|
Other income, net
|
(3 | ) | — | — | — | (3 | ) | |||||||||||||
|
|
||||||||||||||||||||
|
Income before provision for
income taxes and equity in
earnings of subsidiaries
|
(13 | ) | 205 | 22 | — | 214 | ||||||||||||||
|
Provision for income taxes
|
(7 | ) | 83 | 6 | — | 82 | ||||||||||||||
|
|
||||||||||||||||||||
|
Income before equity in earnings
of subsidiaries
|
(6 | ) | 122 | 16 | — | 132 | ||||||||||||||
|
Equity in earnings of consolidated
subsidiaries
|
138 | 16 | — | (154 | ) | — | ||||||||||||||
|
Equity in earnings of unconsolidated
subsidiaries, net of tax
|
— | — | — | — | — | |||||||||||||||
|
|
||||||||||||||||||||
|
Net income
|
$ | 132 | $ | 138 | $ | 16 | $ | (154 | ) | $ | 132 | |||||||||
|
|
||||||||||||||||||||
22
Table of Contents
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Unaudited)
| Condensed Consolidating Balance Sheets | ||||||||||||||||||||
| As of March 31, 2010 | ||||||||||||||||||||
| Parent | Guarantors | Non-Guarantors | Eliminations | Total | ||||||||||||||||
| (in millions) | ||||||||||||||||||||
|
Current assets:
|
||||||||||||||||||||
|
Cash and cash equivalents
|
$ | — | $ | 486 | $ | 85 | $ | — | $ | 571 | ||||||||||
|
Accounts receivable:
|
||||||||||||||||||||
|
Trade, net
|
— | 476 | 53 | — | 529 | |||||||||||||||
|
Other
|
— | 23 | 9 | — | 32 | |||||||||||||||
|
Related party receivable
|
10 | — | 37 | (47 | ) | — | ||||||||||||||
|
Inventories
|
— | 243 | 27 | — | 270 | |||||||||||||||
|
Deferred tax assets
|
— | 54 | 5 | — | 59 | |||||||||||||||
|
Prepaid expenses and other current assets
|
88 | 50 | 31 | — | 169 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total current assets
|
98 | 1,332 | 247 | (47 | ) | 1,630 | ||||||||||||||
|
Property, plant and equipment, net
|
— | 1,040 | 66 | — | 1,106 | |||||||||||||||
|
Investments in consolidated subsidiaries
|
3,212 | 494 | — | (3,706 | ) | — | ||||||||||||||
|
Investments in unconsolidated
subsidiaries
|
— | — | 10 | — | 10 | |||||||||||||||
|
Goodwill
|
— | 2,961 | 23 | — | 2,984 | |||||||||||||||
|
Other intangible assets, net
|
— | 2,620 | 82 | — | 2,702 | |||||||||||||||
|
Long-term receivable, related parties
|
2,788 | 689 | 54 | (3,531 | ) | — | ||||||||||||||
|
Other non-current assets
|
426 | 108 | 9 | — | 543 | |||||||||||||||
|
Non-current deferred tax assets
|
— | — | 142 | — | 142 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total assets
|
$ | 6,524 | $ | 9,244 | $ | 633 | $ | (7,284 | ) | $ | 9,117 | |||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Current liabilities:
|
||||||||||||||||||||
|
Accounts payable and accrued expenses
|
$ | 95 | $ | 640 | $ | 63 | $ | — | $ | 798 | ||||||||||
|
Related party payable
|
— | 47 | — | (47 | ) | — | ||||||||||||||
|
Deferred revenue
|
— | 34 | 2 | — | 36 | |||||||||||||||
|
Income taxes payable
|
— | 16 | — | — | 16 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total current liabilities
|
95 | 737 | 65 | (47 | ) | 850 | ||||||||||||||
|
Long-term obligations to third parties
|
2,553 | 13 | — | — | 2,566 | |||||||||||||||
|
Long-term obligations to related parties
|
689 | 2,841 | 1 | (3,531 | ) | — | ||||||||||||||
|
Non-current deferred tax liabilities
|
— | 1,024 | 18 | — | 1,042 | |||||||||||||||
|
Non-current deferred revenue
|
— | 820 | 41 | — | 861 | |||||||||||||||
|
Other non-current liabilities
|
125 | 597 | 14 | — | 736 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total liabilities
|
3,462 | 6,032 | 139 | (3,578 | ) | 6,055 | ||||||||||||||
|
|
||||||||||||||||||||
|
Total equity
|
3,062 | 3,212 | 494 | (3,706 | ) | 3,062 | ||||||||||||||
|
|
||||||||||||||||||||
|
Total liabilities and
stockholders’ equity
|
$ | 6,524 | $ | 9,244 | $ | 633 | $ | (7,284 | ) | $ | 9,117 | |||||||||
|
|
||||||||||||||||||||
23
Table of Contents
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Unaudited)
| Condensed Consolidating Balance Sheet | ||||||||||||||||||||
| As of December 31, 2009 | ||||||||||||||||||||
| Parent | Guarantors | Non-Guarantors | Eliminations | Total | ||||||||||||||||
| (in millions) | ||||||||||||||||||||
|
Current assets:
|
||||||||||||||||||||
|
Cash and cash equivalents
|
$ | — | $ | 191 | $ | 89 | $ | — | $ | 280 | ||||||||||
|
Accounts receivable:
|
||||||||||||||||||||
|
Trade, net
|
— | 485 | 55 | — | 540 | |||||||||||||||
|
Other
|
— | 24 | 8 | — | 32 | |||||||||||||||
|
Related party receivable
|
13 | 4 | — | (17 | ) | — | ||||||||||||||
|
Inventories
|
— | 234 | 28 | — | 262 | |||||||||||||||
|
Deferred tax assets
|
— | 49 | 4 | — | 53 | |||||||||||||||
|
Prepaid and other current assets
|
79 | 10 | 23 | — | 112 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total current assets
|
92 | 997 | 207 | (17 | ) | 1,279 | ||||||||||||||
|
Property, plant and equipment, net
|
— | 1,044 | 65 | — | 1,109 | |||||||||||||||
|
Investments in consolidated subsidiaries
|
3,085 | 471 | — | (3,556 | ) | — | ||||||||||||||
|
Investments in unconsolidated
subsidiaries
|
— | — | 9 | — | 9 | |||||||||||||||
|
Goodwill
|
— | 2,961 | 22 | — | 2,983 | |||||||||||||||
|
Other intangible assets, net
|
— | 2,624 | 78 | — | 2,702 | |||||||||||||||
|
Long-term receivable, related parties
|
3,172 | 434 | 38 | (3,644 | ) | — | ||||||||||||||
|
Other non-current assets
|
425 | 110 | 8 | — | 543 | |||||||||||||||
|
Non-current deferred tax assets
|
— | — | 151 | — | 151 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total assets
|
$ | 6,774 | $ | 8,641 | $ | 578 | $ | (7,217 | ) | $ | 8,776 | |||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Current liabilities:
|
||||||||||||||||||||
|
Accounts payable and accrued expenses
|
$ | 78 | $ | 710 | $ | 62 | $ | — | $ | 850 | ||||||||||
|
Related party payable
|
— | 13 | 4 | (17 | ) | — | ||||||||||||||
|
Income taxes payable
|
— | — | 4 | — | 4 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total current liabilities
|
78 | 723 | 70 | (17 | ) | 854 | ||||||||||||||
|
Long-term obligations to third parties
|
2,946 | 14 | — | — | 2,960 | |||||||||||||||
|
Long-term obligations to related parties
|
434 | 3,209 | 1 | (3,644 | ) | — | ||||||||||||||
|
Non-current deferred tax liabilities
|
— | 1,015 | 23 | — | 1,038 | |||||||||||||||
|
Non-current deferred revenue
|
— | — | — | — | — | |||||||||||||||
|
Other non-current liabilities
|
129 | 595 | 13 | — | 737 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total liabilities
|
3,587 | 5,556 | 107 | (3,661 | ) | 5,589 | ||||||||||||||
|
|
||||||||||||||||||||
|
Total stockholders’ equity
|
3,187 | 3,085 | 471 | (3,556 | ) | 3,187 | ||||||||||||||
|
|
||||||||||||||||||||
|
Total liabilities and
stockholders’ equity
|
$ | 6,774 | $ | 8,641 | $ | 578 | $ | (7,217 | ) | $ | 8,776 | |||||||||
|
|
||||||||||||||||||||
24
Table of Contents
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Unaudited)
| Condensed Consolidating Statements of Cash Flows | ||||||||||||||||||||
| For the Three Months Ended March 31, 2010 | ||||||||||||||||||||
| Parent | Guarantor | Non-Guarantor | Eliminations | Total | ||||||||||||||||
| (in millions) | ||||||||||||||||||||
|
Operating activities:
|
||||||||||||||||||||
|
Net cash provided by operating
activities
|
$ | (15 | ) | $ | 992 | $ | 10 | $ | — | $ | 987 | |||||||||
|
Investing activities:
|
||||||||||||||||||||
|
Purchases of property, plant and equipment
|
— | (51 | ) | (4 | ) | — | (55 | ) | ||||||||||||
|
Issuance of related party notes receivable
|
— | (255 | ) | (15 | ) | 270 | — | |||||||||||||
|
Proceeds from repayment of related party
notes receivable
|
405 | — | — | (405 | ) | — | ||||||||||||||
|
|
||||||||||||||||||||
|
Net cash used in investing activities
|
405 | (306 | ) | (19 | ) | (135 | ) | (55 | ) | |||||||||||
|
Financing activities:
|
||||||||||||||||||||
|
Proceeds from related party long-term debt
|
255 | 15 | — | (270 | ) | — | ||||||||||||||
|
Repayment of related party long-term debt
|
— | (405 | ) | — | 405 | — | ||||||||||||||
|
Repayment of senior unsecured credit
facility
|
(405 | ) | — | — | — | (405 | ) | |||||||||||||
|
Repurchase of shares of common stock
|
(202 | ) | — | — | — | (202 | ) | |||||||||||||
|
Dividends paid
|
(38 | ) | — | — | — | (38 | ) | |||||||||||||
|
Other, net
|
— | — | — | — | — | |||||||||||||||
|
|
||||||||||||||||||||
|
Net cash used in financing activities
|
(390 | ) | (390 | ) | — | 135 | (645 | ) | ||||||||||||
|
Cash and cash equivalents —
net change from:
|
||||||||||||||||||||
|
Operating, investing and financing
activities
|
— | 296 | (9 | ) | — | 287 | ||||||||||||||
|
Currency translation
|
— | (1 | ) | 5 | — | 4 | ||||||||||||||
|
Cash and cash equivalents at beginning of
period
|
— | 191 | 89 | — | 280 | |||||||||||||||
|
|
||||||||||||||||||||
|
Cash and cash equivalents at end of period
|
$ | — | $ | 486 | $ | 85 | $ | — | $ | 571 | ||||||||||
|
|
||||||||||||||||||||
25
Table of Contents
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Unaudited)
| Condensed Consolidating Statements of Cash Flows | ||||||||||||||||||||
| For the Three Months Ended March 31, 2009 | ||||||||||||||||||||
| Parent | Guarantors | Non-Guarantors | Eliminations | Total | ||||||||||||||||
| (in millions) | ||||||||||||||||||||
|
Operating activities:
|
||||||||||||||||||||
|
Net cash (used in) provided by
operating activities
|
$ | (30 | ) | $ | 203 | $ | 5 | $ | — | $ | 178 | |||||||||
|
Investing activities:
|
||||||||||||||||||||
|
Purchases of property, plant and
equipment
|
— | (78 | ) | — | — | (78 | ) | |||||||||||||
|
Purchases of intangible assets
|
— | (5 | ) | — | — | (5 | ) | |||||||||||||
|
Proceeds from disposals intangible assets
|
— | 68 | — | — | 68 | |||||||||||||||
|
Issuance of notes receivable
|
— | (185 | ) | — | 185 | — | ||||||||||||||
|
|
||||||||||||||||||||
|
Net cash (used in) provided by
investing activities
|
— | (200 | ) | — | 185 | (15 | ) | |||||||||||||
|
Financing activities:
|
||||||||||||||||||||
|
Proceeds from issuance of long-term debt
related to guarantor/ non-guarantor
|
185 | — | — | (185 | ) | — | ||||||||||||||
|
Repayment of senior unsecured credit
facility
|
(155 | ) | — | — | — | (155 | ) | |||||||||||||
|
Other, net
|
— | (1 | ) | — | — | (1 | ) | |||||||||||||
|
|
||||||||||||||||||||
|
Net cash provided by (used in)
financing activities
|
30 | (1 | ) | — | (185 | ) | (156 | ) | ||||||||||||
|
Cash and cash equivalents —
net change from:
|
||||||||||||||||||||
|
Operating, investing and financing
activities
|
— | 2 | 5 | — | 7 | |||||||||||||||
|
Currency translation
|
— | 2 | (4 | ) | — | (2 | ) | |||||||||||||
|
Cash and cash equivalents at beginning
of period
|
— | 145 | 69 | — | 214 | |||||||||||||||
|
|
||||||||||||||||||||
|
Cash and cash equivalents at end of
period
|
$ | — | $ | 149 | $ | 70 | $ | — | $ | 219 | ||||||||||
|
|
||||||||||||||||||||
26
Table of Contents
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion in conjunction with our audited consolidated
financial statements and notes thereto in our Annual Report on Form 10-K for the year ended
December 31, 2009.
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended (the “Exchange Act”), including, in particular, statements about future
events, future financial performance, plans, strategies, expectations, prospects, competitive
environment, regulation and availability of raw materials. Forward-looking statements include all
statements that are not historical facts and can be identified by the use of forward-looking
terminology such as the words “may,” “will,” “expect,” “anticipate,” “believe,” “estimate,” “plan,”
“intend” or the negative of these terms or similar expressions in this Quarterly Report on Form
10-Q. We have based these forward-looking statements on our current views with respect to future
events and financial performance. Our actual financial performance could differ materially from
those projected in the forward-looking statements due to the inherent uncertainty of estimates,
forecasts and projections, and our financial performance may be better or worse than anticipated.
Given these uncertainties, you should not put undue reliance on any forward-looking statements. All
of the forward-looking statements are qualified in their entirety by reference to the factors
discussed under “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year
ended December 31, 2009. Forward-looking statements represent our estimates and assumptions only as
of the date that they were made. We do not undertake any duty to update the forward-looking
statements, and the estimates and assumptions associated with them, after the date of this
Quarterly Report on Form 10-Q, except to the extent required by applicable securities laws.
This Quarterly Report on Form 10-Q contains some of our owned or licensed trademarks, trade
names and service marks, which we refer to as our brands. All of the product names included in this
Quarterly Report on Form 10-Q are either our registered trademarks or those of our licensors.
Cadbury plc and Cadbury Schweppes plc are hereafter collectively referred to as “Cadbury”
unless otherwise indicated. Kraft Foods Inc. acquired Cadbury on February 2, 2010. Kraft Foods,
Inc. and/or its subsidiaries are hereafter collectively referred to as “Kraft”.
Overview
We are a leading integrated brand owner, manufacturer and distributor of non-alcoholic
beverages in the United States, Canada and Mexico, with a diverse portfolio of flavored carbonated
soft drinks (“CSDs”) and non-carbonated beverages (“NCBs”), including ready-to-drink teas, juices,
juice drinks and mixers. Our brand portfolio includes popular CSD brands such as Dr Pepper, 7UP,
Sunkist soda, A&W, Canada Dry, Crush, Squirt, Peñafiel, Schweppes and Venom Energy, and NCB brands
such as Snapple, Mott’s, Hawaiian Punch, Clamato, Rose’s and Mr & Mrs T mixers. Our largest brand,
Dr Pepper, is a leading flavored CSD in the United States according to The Nielsen Company. We have
some of the most recognized beverage brands in North America, with significant consumer awareness
levels and long histories that evoke strong emotional connections with consumers.
We operate as an integrated brand owner, manufacturer and distributor through our three segments. We believe our integrated business model strengthens our route-to-market,
provides opportunities for net sales and profit growth through the alignment of the economic
interests of our brand ownership and our manufacturing and distribution businesses through both our
Direct Store Delivery (“DSD”) system and our Warehouse Direct (“WD”) delivery system, which enables us
to be more flexible and responsive to the changing needs of our large retail customers and allows
us to more fully leverage our scale and reduce costs by creating greater geographic manufacturing
and distribution coverage.
The
beverage market is subject to some seasonal variations. Our beverage sales are generally
higher during the warmer months and also can be influenced by the timing of holidays and religious
festivals as well as weather fluctuations.
Beverage Concentrates
Our
Beverage Concentrates segment is principally a brand ownership and
ingredient manufacturing and distribution business. In this segment
we manufacture and sell beverage concentrates and syrups in the United States and Canada. Most of
the brands in this segment are CSD brands. Key brands include Dr Pepper, 7UP, Sunkist soda, A&W,
Canada Dry, Crush, Schweppes, Squirt, RC Cola, Sundrop, Diet Rite, Welch’s, Vernors and Country
Time and the concentrate form of Hawaiian Punch.
Almost all of our beverage concentrates are manufactured at our plant in St. Louis, Missouri.
27
Table of Contents
The 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 them 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.
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 United States and Canada. Key NCB brands in this segment include Snapple, Mott’s,
Hawaiian Punch, Clamato, Yoo-Hoo, Country Time, Nantucket Nectars, ReaLemon, Mr and Mrs T, Rose’s
and Margaritaville. Key CSD brands in this segment include Dr Pepper, 7UP, Sunkist soda, A&W,
Canada Dry, Squirt, RC Cola, Welch’s, Vernors, IBC, Mistic and Venom Energy. Additionally, we
distribute third party brands such as FIJI mineral water and AriZona tea and a portion of our sales
come from bottling beverages and other products for private label owners or others for a fee.
Although the majority of our Packaged Beverages’ net sales relate to our brands, we also provide a
route-to-market for third party brand owners seeking effective distribution for their new and
emerging brands. These brands give us exposure in certain markets to fast growing segments of the
beverage industry with minimal capital investment.
Our Packaged Beverages’ products are manufactured in multiple facilities across the United
States and are sold or distributed to retailers and their warehouses by our own distribution
network or by third party distributors. The raw materials used to manufacture our products include
aluminum cans and ends, glass bottles, PET bottles and caps, paper products, sweeteners, juices,
water, beverage concentrates and other ingredients.
We sell our Packaged Beverages’ products both through our DSD system, supported by a fleet of
more than 5,000 trucks and approximately 12,000 employees, including sales representatives,
merchandisers, drivers and warehouse workers, as well as through our WD system, both of which
include the sales to all major retail channels, including supermarkets, mass merchandisers, club
stores, convenience stores, gas stations, small groceries, drug chains and dollar stores.
Latin America Beverages
Our Latin America Beverages segment is a brand ownership, manufacturing and distribution
business. This segment participates mainly in the carbonated mineral water, flavored CSD, bottled
water and vegetable juice categories, with particular strength in carbonated mineral water and
grapefruit flavored CSDs. Key brands include Peñafiel, Squirt, Clamato and Aguafiel.
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 distributors. In Mexico, we also participate in a joint venture to manufacture Aguafiel brand
water with Acqua Minerale San Benedetto. We provide expertise in the Mexican beverage market and
Acqua Minerale San Benedetto provides expertise in water production and new packaging technologies.
We sell our finished beverages through all major Mexican retail channels, including the “mom
and pop” stores, supermarkets, hypermarkets, and on premise channels.
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, or 24
twelve ounce servings.
28
Table of Contents
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
concentrate cases sold.
Although net sales in our concentrate businesses are based on concentrate case sales, we
believe that bottler case sales are also a significant measure of our performance because they
measure sales of packaged beverages into retail channels.
Packaged Beverages Sales Volume
In our Packaged Beverages segment, we measure volume as case sales to customers. A case sale
represents a unit of measurement equal to 288 fluid ounces of packaged beverage sold by us. Case
sales include both our owned brands and certain brands licensed to and/or distributed by us.
Volume in Bottler Case Sales
In addition to sales volume, we measure volume in bottler case sales (“volume (BCS)”) as sales
of packaged beverages, in equivalent 288 fluid ounce cases, sold by us and our bottling partners to
retailers and independent distributors. Our contract manufacturing
sales are not included or reported as part of volume (BCS).
Bottler case sales, concentrate case sales and packaged beverage sales volume are not equal
during any given period due to changes in bottler concentrate inventory levels, which can be
affected by seasonality, bottler inventory and manufacturing practices, and the timing of price
increases and new product introductions.
Company Highlights and Recent Developments
| • | Net sales totaled $1,248 million for the three months ended March 31, 2010, a decrease of $12 million, or 1%, from the three months ended March 31, 2009. |
| • | Net income for the three months ended March 31, 2010, was $89 million, compared to $132 million for the year ago period, a decrease of $43 million, or 33%. |
| • | Diluted earnings per share were $0.35 per share for the three months ended March 31, 2010, compared with $0.52 for the year ago period. |
| • | On February 26, 2010, we completed the licensing of certain brands and received a one-time nonrefundable cash payment of $900 million from PepsiCo, Inc. (“PepsiCo”). |
| • | During the first quarter of 2010, we repaid $405 million of our senior unsecured credit facility, which was the facility’s principal balance outstanding as of December 31, 2009. |
| • | During the first quarter of 2010, we paid our first dividend of $0.15 per share, and our Board of Directors (the “Board”) declared DPS’ second dividend of $0.15 per share, payable on April 9, 2010. |
| • | During the first quarter of 2010, we repurchased shares of our common stock valued at approximately $202 million. |
| • | During the first quarter of 2010, Moody’s Rating Service (“Moody’s”) raised our debt rating from Baa3 with a stable outlook to Baa2 with a positive outlook and Standard & Poor’s (“S&P”) raised our debt rating from BBB- with a positive outlook to BBB with a stable outlook. |
Results of Operations
We eliminate from our financial results all intercompany transactions between entities
included in the combination and the intercompany transactions with our equity method investees.
References in the financial tables to percentage changes that are not meaningful are denoted
by “NM.”
29
Table of Contents
Consolidated Operations
The following table sets forth our unaudited consolidated results of operation for the three
months ended March 31, 2010 and 2009 (dollars in millions).
| For the Three Months Ended March 31, | ||||||||||||||||||||
| 2010 | 2009 | Percentage | ||||||||||||||||||
| Dollars | Percent | Dollars | Percent | Change | ||||||||||||||||
|
Net sales
|
$ | 1,248 | 100.0 | % | $ | 1,260 | 100.0 | % | (1 | )% | ||||||||||
|
Cost of sales
|
496 | 39.7 | 531 | 42.1 | (7 | ) | ||||||||||||||
|
|
||||||||||||||||||||
|
Gross profit
|
752 | 60.3 | 729 | 57.9 | 3 | |||||||||||||||
|
Selling, general and administrative expenses
|
531 | 42.6 | 499 | 39.6 | 6 | |||||||||||||||
|
Depreciation and amortization
|
31 | 2.5 | 27 | 2.1 | 15 | |||||||||||||||
|
Other operating expense (income), net
|
3 | 0.2 | (62 | ) | (4.9 | ) | (105 | ) | ||||||||||||
|
|
||||||||||||||||||||
|
Income from operations
|
187 | 15.0 | 265 | 21.1 | (29 | ) | ||||||||||||||
|
Interest expense
|
34 | 2.7 | 55 | 4.4 | (38 | ) | ||||||||||||||
|
Interest income
|
(1 | ) | (0.1 | ) | (1 | ) | (0.1 | ) | NM | |||||||||||
|
Other income, net
|
(3 | ) | (0.2 | ) | (3 | ) | (0.2 | ) | NM | |||||||||||
|
|
||||||||||||||||||||
|
Income before provision for income taxes and equity in
earnings of unconsolidated subsidiaries
|
157 | 12.6 | 214 | 17.0 | (27 | ) | ||||||||||||||
|
Provision for income taxes
|
68 | 5.5 | 82 | 6.5 | (17 | ) | ||||||||||||||
|
|
||||||||||||||||||||
|
Income before equity in earnings of unconsolidated
subsidiaries
|
89 | 7.1 | 132 | 10.5 | (33 | ) | ||||||||||||||
|
Equity in earnings of unconsolidated subsidiaries, net
of tax
|
— | — | — | — | NM | |||||||||||||||
|
|
||||||||||||||||||||
|
Net income
|
$ | 89 | 7.1 | % | $ | 132 | 10.5 | % | (33 | )% | ||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Earnings per common share:
|
||||||||||||||||||||
|
Basic
|
$ | 0.35 | NM | $ | 0.52 | NM | (33 | )% | ||||||||||||
|
Diluted
|
$ | 0.35 | NM | $ | 0.52 | NM | (33 | )% | ||||||||||||
Volume.
Volume (BCS) increased 3% for the three months ended March 31, 2010, compared with the
three months ended March 31, 2009. In the U.S. and Canada, volume increased 2% and in Mexico and
the Caribbean, volume increased 8% compared with the year ago period. CSD volume increased 2% and
NCB volume increased 6%. In CSDs, Crush increased 22% compared with the year ago period due to
expanded distribution. Dr Pepper volume increased by 3% compared with the year ago period. Our
“Core 4” brands (7UP, Sunkist soda, A&W and Canada Dry) were down 2% compared to the year ago
period as double-digit declines in Sunkist soda and low single-digit declines in A&W and 7UP were
partially offset by a double-digit increase in Canada Dry. Peñafiel volume decreased 10% due to
decreased sales to third party distributors. Squirt volume increased 8%. In NCBs, 17% growth in
Snapple was due to the successful restage of the brand and the growth of value offerings. A 14%
increase in Mott’s was the result of new distribution and strong brand support. Additionally, a 7%
increase in Hawaiian Punch was partially offset by declines in third party NCB brands, such as
AriZona and FIJI.
Although volume (BCS) increased 3% for the three months ended March 31, 2010, compared with
the three months ended March 31, 2009, sales volume decreased 3% for the same period. The sales
volume decreased as a result of lower concentrate sales as third-party bottlers purchased higher
levels of concentrate during the fourth quarter of 2009, a decline in contract manufacturing
(contract manufacturing is not included in volume (BCS)) and unfavorable comparisons related to the
successful Crush launch and related pipeline fill in the first quarter of 2009.
Net Sales.
Net sales decreased $12 million, or 1%, for the three months ended March 31, 2010,
compared with the three months ended March 31, 2009. The decrease was primarily attributable to an
overall sales volume decrease, including a decline in contract manufacturing within our Packaged
Beverages segment, and an unfavorable product mix. These decreases were partially offset by the
favorable impact of foreign currency and the revenue recognized for the PepsiCo license.
Gross Profit.
Gross profit increased $23 million for the three months ended March 31, 2010,
compared with the three months ended March 31, 2009. Gross margin of 60% for the three months ended
March 31, 2010, was higher than the 58% gross margin for the three months ended March 31, 2009,
primarily due to lower costs for packaging materials, sweeteners, and other commodity costs and a
continued shift in CSDs from twelve ounce can volume towards two liter PET.
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Income from Operations.
Income from operations decreased $78 million to $187 million for the
three months ended March 31, 2010, compared with the year ago period. The decrease was primarily
attributable to the absence of one-time gains of $62 million primarily related to the termination
of distribution agreements during the three months ended March 31, 2009. Selling, general and
administrative expenses increased by $32 million primarily due to $8 million of one-time
transaction costs associated with the PepsiCo agreement. Other drivers of the increase during the
three months ended March 31, 2010, were higher productivity office investments, the unfavorable
impact of foreign currency and the startup of our manufacturing facility in Victorville,
California.
Interest Expense, Interest Income and Other Income.
Interest expense decreased $22 million
compared with the year ago period, reflecting the repayment of our senior unsecured Term Loan A
facility during December 2009. Other income of $3 million for the three months
ended March 31, 2010, related to indemnity income associated with the Tax Indemnity Agreement with
Kraft.
Provision for Income Taxes.
The effective tax rates for the three months ended March 31, 2010
and 2009 were 43.3% and 38.3%, respectively. The increase in the effective tax rate for the three
months ended March 31, 2010, was primarily driven by a previous change in the provincial income tax
rate for Ontario, Canada. The impact of the change in tax rate increased the provision for income
taxes and effective tax rate by $13 million and 8.3%, respectively. Refer to Note 8 of the Notes
to our Unaudited Condensed Consolidated Financial Statements for further information.
Results of Operations by Segment
We report our business in three segments: Beverage Concentrates, Packaged Beverages and Latin
America Beverages. The key financial measures management uses to assess the performance of our
segments are net sales and segment operating profit (“SOP”). The following tables set forth net
sales and SOP for our segments for the three months ended March 31, 2010 and 2009, as well as the
adjustments necessary to reconcile our total segment results to our consolidated results presented
in accordance with accounting principles generally accepted in the United States of America
(“U.S. GAAP”) (in millions).
| For the | ||||||||
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2010 | 2009 | |||||||
|
Segment Results — Net sales
|
||||||||
|
Beverage Concentrates
|
$ | 240 | $ | 243 | ||||
|
Packaged Beverages
|
929 | 944 | ||||||
|
Latin America Beverages
|
79 | 73 | ||||||
|
|
||||||||
|
Net sales
|
$ | 1,248 | $ | 1,260 | ||||
|
|
||||||||
|
|
||||||||
|
Segment Results — SOP
|
||||||||
|
Beverage Concentrates
|
$ | 146 | $ | 150 | ||||
|
Packaged Beverages
|
114 | 107 | ||||||
|
Latin America Beverages
|
7 | 9 | ||||||
|
|
||||||||
|
Total SOP
|
267 | 266 | ||||||
|
Unallocated corporate costs
|
77 | 63 | ||||||
|
Other operating expense (income), net
|
3 | (62 | ) | |||||
|
|
||||||||
|
Income from operations
|
187 | 265 | ||||||
|
Interest expense, net
|
33 | 54 | ||||||
|
Other income, net
|
(3 | ) | (3 | ) | ||||
|
|
||||||||
|
Income before provision for income taxes and
equity in earnings of unconsolidated
subsidiaries
|
$ | 157 | $ | 214 | ||||
|
|
||||||||
31
Table of Contents
Beverage Concentrates
The following table details our Beverage Concentrates segment’s net sales and SOP for the
three months ended March 31, 2010 and 2009 (in millions):
| For the | ||||||||||||
| Three Months Ended | ||||||||||||
| March 31, | Amount | |||||||||||
| 2010 | 2009 | Change | ||||||||||
|
Net sales
|
$ | 240 | $ | 243 | $ | (3 | ) | |||||
|
SOP
|
146 | 150 | (4 | ) | ||||||||
Net sales decreased $3 million, or approximately 1%, for the three months ended March 31,
2010, compared with the three months ended March 31, 2009. The decrease was primarily due to a 4%
decrease in concentrate case sales volume partially offset by concentrate price increases and $3
million in revenue recognized under the PepsiCo license. Concentrate price increases, which were
effective in January 2010, added an incremental $9 million to net sales during the three months
ended March 31, 2010. The decrease in volume was primarily driven by the unfavorable comparisons
related to the successful Crush launch and related pipeline fill during the first quarter of 2009.
Also contributing to the volume decrease during the first quarter of 2010 were higher concentrate
sales during the fourth quarter of 2009, ahead of the anticipated price increases as compared to
the year ago period.
SOP decreased $4 million, or approximately 3% for the three months ended March 31, 2010, as
compared with the year ago period, primarily driven by the decrease in net sales.
Volume (BCS) increased approximately 3% for the three months ended March 31, 2010, as compared
with the year ago period. The increase was primarily driven by the launch of Cherry Crush in the
first quarter of 2010. Dr Pepper also saw increases led by the launch of the Cherry line extensions
late in the first quarter of 2009. The Core 4 brands in total remained relatively flat.
Packaged Beverages
The following table details our Packaged Beverages segment’s net sales and SOP for the three
months ended March 31, 2010 and 2009 (in millions):
| For the | ||||||||||||
| Three Months Ended | ||||||||||||
| March 31, | Amount | |||||||||||
| 2010 | 2009 | Change | ||||||||||
|
Net sales
|
$ | 929 | $ | 944 | $ | (15 | ) | |||||
|
SOP
|
114 | 107 | 7 | |||||||||
Sales volume decreased 4% for the three months ended March 31, 2010, compared with the three
months ended March 31, 2009. The decrease was the result of a decline in contract manufacturing in
2009 partially offset by volume growth in our NCB category. The decline in contract manufacturing
negatively impacted total volume by approximately 4%. Total CSD volume decreased 7%. Volume for our
Core 4 brands decreased 4%, due to a mid single-digit decline in 7UP and a double-digit decline in
Sunkist soda, partially offset by a double-digit increase in Canada Dry due to targeted marketing
programs. Total NCB volume increased 11% as a result of a 19% increase in Snapple due to the
successful restage of the brand and growth of value offerings, a 14% increase in Mott’s and an 11%
increase in Hawaiian Punch.
Net sales decreased $15 million for the three months ended March 31, 2010, compared with the
three months ended March 31, 2009. The decline in contract manufacturing reduced net sales for the
three months ended March 31, 2010, by $20 million. Net sales were favorably impacted by volume
increases, primarily in NCBs, and the favorable impact of foreign currency, offset in part by the
decrease in CSD volume and net pricing decreases, primarily in CSDs.
SOP increased $7 million for the three months ended March 31, 2010, compared with the three
months ended March 31, 2009, primarily due to lower costs for packaging materials, sweeteners and
other commodity costs, partially offset by higher benefit costs, costs associated with the startup
of our manufacturing facility in Victorville, California, and higher productivity office
investments.
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Table of Contents
Latin America Beverages
The following table details our Latin America Beverages segment’s net sales and SOP for the
three months ended March 31, 2010 and 2009 (in millions):
| For the | ||||||||||||
| Three Months Ended | ||||||||||||
| March 31, | Amount | |||||||||||
| 2010 | 2009 | Change | ||||||||||
|
Net sales
|
$ | 79 | $ | 73 | $ | 6 | ||||||
|
SOP
|
7 | 9 | (2 | ) | ||||||||
Sales
volume increased 8% for the three months ended March 31, 2010, as compared with the
three months ended March 31, 2009. The increase in volume was driven by a 16% increase in Squirt
volume due to higher sales to third party bottlers, a 75% increase in Crush volume with the
introduction of new flavors in a 2.3 liter value offering, as well as additional distribution
routes added throughout 2009. These volume increases were partially offset by a 10% decrease in
Peñafiel due to decreased sales to third party distributors.
Net sales increased $6 million for the three months ended March 31, 2010, compared with the
year ago period primarily due to the $6 million favorable impact of changes in foreign currency and
increases in sales volume, partially offset by an unfavorable impact related to product mix.
SOP decreased $2 million for the three months ended March 31, 2010, compared with the three
months ended March 31, 2009, primarily due to an unfavorable sales mix and increased spending to
support the distribution route expansion and information technology infrastructure upgrades. This
was partially offset by increased sales volume and the favorable impact of changes in foreign
currency.
Critical Accounting Estimates
The process of preparing our unaudited condensed consolidated financial statements in
conformity with U.S. GAAP requires the use of estimates and judgments that affect the reported
amounts of assets, liabilities, revenue, and expenses. Critical accounting estimates are both
fundamental to the portrayal of a company’s financial condition and results and require difficult,
subjective or complex estimates and assessments. These estimates and judgments are based on
historical experience, future expectations and other factors and assumptions we believe to be
reasonable under the circumstances. The most significant estimates and judgments are reviewed on an
ongoing basis and revised when necessary. Actual amounts may differ from these estimates and
judgments. We have identified the following policies as critical accounting policies:
| • | revenue recognition; |
| • | customer marketing programs and incentives; |
| • | goodwill and other indefinite lived intangible assets; |
| • | definite lived intangible assets; |
| • | stock-based compensation; |
| • | pension and postretirement benefits; |
| • | risk management programs; and |
| • | income taxes. |
These critical accounting policies are discussed in greater detail in our Annual Report on
Form 10-K for the year ended December 31, 2009.
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Table of Contents
Liquidity and Capital Resources
Trends and Uncertainties Affecting Liquidity
We believe that the following transactions, trends and uncertainties may impact liquidity:
| • | changes in economic factors could impact consumers’ purchasing power; and |
| • | we will continue to make capital expenditures to upgrade our existing plants and distribution fleet of trucks, replace and expand our cold drink equipment and make investments in IT systems in order to improve operating efficiencies and lower costs. |
2010 Borrowings and Repayments
On November 20, 2009, the Board authorized us to issue up to $1,500 million of debt securities
through the Securities and Exchange Commission shelf registration process. At March 31, 2010, $650
million remained authorized to be issued following the issuance described below.
During the first quarter of 2010, we repaid $405 million borrowed from the revolving credit
facility (the “Revolver”).
The
following is a description of our senior
unsecured credit facility and the senior unsecured notes. The summaries of the senior unsecured
credit facility and the senior unsecured notes are qualified in their entirety by the specific
terms and provisions of the senior unsecured credit facility agreement (the “Facility Agreement”)
and the indenture governing the senior unsecured notes, respectively, copies of which have
previously been filed, as referenced in the exhibits to our Annual Report on Form 10-K for the year
ended December 31, 2009.
Senior Unsecured Credit Facility
Our senior unsecured credit facility originally provided senior unsecured financing of up to
$2,700 million, which consisted of:
| • | the senior unsecured Term Loan A facility (the “Term Loan A”) in an aggregate principal amount of $2,200 million with a term of five years, which was fully repaid in December 2009 prior to its maturity, and under which no further borrowings may be made; and |
| • | the Revolver in an aggregate principal amount of $500 million with a maturity in 2013. The balance of principal borrowings under the Revolver was $0 and $405 million as of March 31, 2010 and December 31, 2009, respectively. Up to $75 million of the Revolver is available for the issuance of letters of credit, of which $42 million and $41 million were utilized as of March 31, 2010, and December 31, 2009, respectively. Balances available for additional borrowings and letters of credit were $458 million and $33 million, respectively, as of March 31, 2010. |
Borrowings under the senior unsecured credit facility bear interest at a floating rate per
annum based upon the London interbank offered rate for dollars (“LIBOR”) or the alternate base rate
(“ABR”), in each case plus an applicable margin which varies based upon our debt ratings, from
1.00% to 2.50%, in the case of LIBOR loans and 0.00% to 1.50% in the case of ABR loans. The ABR
means the greater of (a) JPMorgan Chase Bank’s prime rate and (b) the federal funds effective rate
plus one half of 1%. Interest is payable on the last day of the interest period, but not
less than quarterly, in the case of any LIBOR loan and on the last day of March, June, September
and December of each year in the case of any ABR loan. The average interest rate for the three
months ended March 31, 2010 and 2009, was 2.25% and 5.10%, respectively. Interest expense was $2
million and $26 million for the three months ended March 31, 2010 and 2009, respectively.
Amortization of deferred financing costs of $1 million and $4 million for the three months ended
March 31, 2010 and 2009, respectively, was included in interest expense.
We utilized interest rate swaps to effectively convert variable interest rates to fixed rates.
Refer to Note 6 of the Notes to our Unaudited Condensed Consolidated Financial Statements for
further information regarding derivatives.
An unused commitment fee is payable quarterly to the lenders on the unused portion of the
commitments in respect of the Revolver equal to 0.15% to 0.50% per annum, depending upon our debt
ratings. Interest expense included $1 million of amortization of deferred financing costs
associated with the Revolver for each of the three months ended March 31, 2010 and 2009.
Principal amounts outstanding under the Revolver are due and payable in full at maturity.
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Table of Contents
All obligations under the senior unsecured credit facility are guaranteed by substantially all
of our existing and future direct and indirect domestic subsidiaries.
The Facility Agreement contains customary negative covenants that, among other things,
restrict our ability to incur debt at subsidiaries that are not guarantors; incur liens; merge or
sell, transfer, lease or otherwise dispose of all or substantially all assets; make investments,
loans, advances, guarantees and acquisitions; enter into transactions with affiliates; and enter
into agreements restricting its ability to incur liens or the ability of subsidiaries to make
distributions. These covenants are subject to certain exceptions described in the Facility
Agreement. In addition, the Facility Agreement requires us to comply with a maximum total leverage
ratio covenant and a minimum interest coverage ratio covenant. The Facility Agreement also contains
certain usual and customary representations and warranties, affirmative covenants and events of
default. As of March 31, 2010 and December 31, 2009, we were in compliance with all financial
covenant requirements.
Senior Unsecured Notes
The 2011 and 2012 Notes
In December 2009, we completed the issuance of $850 million aggregate principal amount of
senior unsecured notes consisting of the 2011 and 2012 Notes. The weighted average interest rate of
the 2011 and 2012 Notes was 2.0% for the three months ended March 31, 2010. The net proceeds from
the sale of the debentures were used for repayment of existing indebtedness under the Term Loan A.
Interest on the 2011 and 2012 Notes is payable semi-annually on June 21 and December 21. Interest
expense was $2 million for the three months ended March 31, 2010.
We utilize interest rate swaps designated as fair value hedges, to convert fixed interest
rates to variable rates. Refer to Note 6 of the Notes to our Unaudited Condensed Consolidated
Financial Statements for further information regarding derivatives.
The indenture governing the 2011 and 2012 Notes, among other things, limits our ability to
incur indebtedness secured by principal properties, to enter into certain sale and leaseback
transactions and to enter into certain mergers or transfers of substantially all of DPS’
assets. The 2011 and 2012 Notes are guaranteed by substantially all of our existing and future
direct and indirect domestic subsidiaries. As of March 31, 2010 and December 31, 2009, we were in
compliance with all covenant requirements.
The 2013, 2018 and 2038 Notes
During 2008, we completed the issuance of $1,700 million aggregate principal amount of senior
unsecured notes consisting of $250 million aggregate principal amount of 6.12% senior notes due
May 1, 2013 (the “2013 Notes”), $1,200 million aggregate principal amount of 6.82% senior notes due
May 1, 2018 (the “2018 Notes”), and $250 million aggregate principal amount of 7.45% senior notes
due May 1, 2038 (the “2038 Notes”). The weighted average interest rate of the 2013, 2018 and 2038
Notes was 6.8% for both three month periods ended March 31, 2010 and 2009. Interest on the senior
unsecured notes is payable semi-annually on May 1 and November 1 and is subject to adjustment.
Interest expense was $29 million each for the three months ended March 31, 2010 and 2009,
respectively.
The indenture governing the senior unsecured notes, among other things, limits our ability to
incur indebtedness secured by principal properties, to enter into certain sale and lease back
transactions and to enter into certain mergers or transfers of substantially all of DPS’
assets. The senior unsecured notes are guaranteed by substantially all of our existing and future
direct and indirect domestic subsidiaries. As of March 31, 2010 and December 31, 2009, we were in
compliance with all covenant requirements.
During the first quarter of 2010, Moody’s raised our debt rating from Baa3 with a stable
outlook to Baa2 with a positive outlook and S&P raised our debt rating from BBB- with a positive
outlook to BBB with a stable outlook. These debt ratings impact the interest we pay on our
financing arrangement. A downgrade of one or both of our debt ratings below investment grade could
increase our interest expense and decrease the cash available to fund anticipated obligations.
Cash Management
We
fund our liquidity needs from cash flow from operations, cash and
hand or amounts available
under our Revolver.
35
Table of Contents
Capital Expenditures
Cash paid for capital expenditures was $55 million for the three months ended March 31, 2010.
Additions primarily related to the development of our new manufacturing and distribution center in
Victorville, California, expansion and replacement of existing cold drink equipment, and IT
investments for systems upgrades. We continue to expect to incur discretionary annual capital
expenditures in an amount equal to approximately 5% of our net sales which we expect to fund
through cash provided by operating activities.
Acquisitions
We may make future acquisitions. For example, we may make acquisitions of regional bottling
companies, distributors, and distribution rights to further extend our geographic coverage. Any
acquisitions may require future capital expenditures and restructuring expenses.
Liquidity
Based on our current and anticipated level of operations, we believe that our proceeds from
operating cash flows will be sufficient to meet our anticipated obligations for the next twelve
months. Excess cash provided by operating activities may be used to fund capital expenditures, pay
dividends and repurchase shares of our common stock. To the extent that our operating cash flows
are not sufficient to meet our liquidity needs, we may utilize cash on hand or amounts available
under our Revolver.
The following table summarizes our cash activity for the three months ended March 31, 2010 and
2009 (in millions):
| For the | ||||||||
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2010 | 2009 | |||||||
|
Net cash provided by operating activities
|
$ | 987 | $ | 178 | ||||
|
Net cash used in investing activities
|
(55 | ) | (15 | ) | ||||
|
Net cash used in financing activities
|
(645 | ) | (156 | ) | ||||
Net Cash Provided by Operating Activities
Net cash provided by operating activities increased $809 million for the three months
ended March 31, 2010, compared with the year ago period. Deferred revenue and non-current deferred
revenue increased due to the receipt of a one-time nonrefundable cash payment of $900 million from
PepsiCo. Working capital unfavorability was primarily driven by a decrease in accounts payable and
accrued expenses due to the timing of the payment of employee bonuses
in the first quarter of 2010 as compared to second quarter of 2009, and increases in other current assets.
Net Cash Used in Investing Activities
The increase of $40 million in cash used in investing activities for the three months
ended March 31, 2010, compared with the year ago period, was primarily attributable to the absence
of one-time cash receipts of $68 million principally from the termination of distribution
agreements, partially offset by a decrease in capital expenditures.
Net Cash Used in Financing Activities
The increase of $489 million in cash used in financing activities for the three months
ended March 31, 2010, compared with the year ago period, was driven by the repayment of our senior
unsecured credit facility and the start of our stock repurchase program.
Cash and Cash Equivalents
Cash and cash equivalents were $571 million as of March 31, 2010, an increase of
$291 million from $280 million as of December 31, 2009. Cash and cash equivalent balances increased
as a result of the $900 million cash payment from PepsiCo, partially offset by the repurchases of
our common stock and repayment of the outstanding principal balance of the Revolver as of December
31, 2009.
Our cash balances are used to fund working capital requirements, scheduled debt and interest
payments, capital expenditures, income tax obligations, dividend payments and repurchases of our
common stock. Cash available in our foreign operations may not be immediately available for these
purposes. Foreign cash balances constitute approximately 15% of our total cash position as of March
31, 2010.
36
Table of Contents
Dividends
On November 20, 2009, our Board declared our first dividend of $0.15 per share on outstanding
common stock, which was paid on January 8, 2010 to stockholders of record at the close of business
on December 21, 2009.
On February 3, 2010, our Board declared a quarterly dividend of $0.15 per share on outstanding
common stock, which was paid on April 9, 2010 to the stockholders of record at the close of
business on March 22, 2010.
Common Stock Repurchases
On February 24, 2010, the Board approved an increase in the total aggregate share repurchase
authorization up to $1 billion. Subsequent to the Board’s authorization, we repurchased 5.8 million
shares of our common stock valued at approximately $202 million in the three months ended March 31,
2010. Refer to Part II, Item 2 of this Quarterly Report on Form 10-Q for additional information
regarding these repurchases.
Contractual Commitments and Obligations
We enter into various contractual obligations that impact, or could impact, our
liquidity. The following table summarizes our contractual obligations and contingencies as of March
31, 2010 (in millions). Based on our current and anticipated level of operations, we believe that
our proceeds from operating cash flows will be sufficient to meet our anticipated obligations. To
the extent that our operating cash flows are not sufficient to meet our liquidity needs, we may
utilize cash on hand and amounts available under our Revolver. Refer to Notes 5 and 10 of the Notes
to our Unaudited Condensed Consolidated Financial Statements for additional information regarding
the items described in this table.
| Payments Due in Year | ||||||||||||||||||||||||||||
| Total | 2010 | 2011 | 2012 | 2013 | 2014 | After 2014 | ||||||||||||||||||||||
|
Revolver
|
$ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||
|
Interest payments
(1)
|
1,325 | 125 | 135 | 131 | 109 | 101 | 724 | |||||||||||||||||||||
|
Operating leases
|
387 | 55 | 66 | 55 | 49 | 39 | 123 | |||||||||||||||||||||
|
Purchase obligations
(2)
|
789 | 347 | 174 | 110 | 94 | 39 | 25 | |||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Total
|
$ | 2,501 | $ | 527 | $ | 375 | $ | 296 | $ | 252 | $ | 179 | $ | 872 | ||||||||||||||
|
|
||||||||||||||||||||||||||||
| (1) | Amounts represent our estimated interest payments based on (a) specified interest rates for fixed rate debt, (b) capital lease amortization schedules and (c) debt amortization schedules. | |
| (2) | Amounts represent payments under agreements to purchase goods or services that are legally binding and that specify all significant terms, including capital obligations and long-term contractual obligations. |
Through March 31, 2010, there have been no other material changes to the amounts disclosed in
our Annual Report on Form 10-K for the year ended December 31, 2009.
Off-Balance Sheet Arrangements
There are no off-balance sheet arrangements that have or are reasonably likely to have a
current or future material effect on our results of operations, financial condition, liquidity,
capital expenditures or capital resources.
Effect of Recent Accounting Pronouncements
Refer to Note 1 of the Notes to our Unaudited Condensed Consolidated Financial Statements for
a discussion of recent accounting standards and pronouncements.
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Table of Contents
Item 3.
Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to market risks arising from changes in market rates and prices, including
movements in foreign currency exchange rates, interest rates, and commodity prices. We do not enter
into derivatives or other financial instruments for trading purposes.
Foreign Exchange Risk
The majority of our net sales, expenses, and capital purchases are transacted in United States
dollars. However, we have some exposure with respect to foreign exchange rate fluctuations. Our
primary exposure to foreign exchange rates is the Canadian dollar and Mexican peso against the
U.S. dollar. Exchange rate gains or losses related to foreign currency transactions are recognized
as transaction gains or losses in our income statement as incurred. As of March 31, 2010, the
impact to net income of a 10% change (up or down) in exchange rates is estimated to be an increase
or decrease of approximately $11 million on an annual basis.
We use derivative instruments such as foreign exchange forward contracts to manage our
exposure to changes in foreign exchange rates. For the period ending March 31, 2010, we had
contracts outstanding with a notional value of $73 million maturing at various dates through
December 15, 2011.
Interest Rate Risk
We centrally manage our debt portfolio and monitor our mix of fixed-rate and variable rate
debt.
We are subject to floating interest rate risk with respect to any borrowings, including those
we may borrow in the future, under the senior unsecured credit facility. As of March 31, 2010,
there were no borrowings outstanding under the senior unsecured credit facility.
Interest Rate Swaps
We enter into interest rate swaps to convert fixed-rate, long-term debt to floating-rate debt.
These swaps are accounted for as either a fair value hedge or an economic hedge under U.S. GAAP.
The fair value hedges qualify for the short-cut method of recognition; therefore, no portion of
these swaps is treated as ineffective.
In December 2009, we entered into interest rate swaps having an aggregate notional amount of
$850 million and durations ranging from two to three years in order to convert fixed-rate,
long-term debt to floating rate debt. These swaps were entered into at the inception of the 2011
and 2012 Notes and were originally accounted for as fair value hedges under U.S. GAAP. Effective
March 10, 2010, $225 million notional of the interest rate swap linked to the 2012 Notes was
restructured to reflect a change in the variable interest rate to be paid by us. This change
triggered the de-designation of the $225 million notional fair value hedge and the corresponding
fair value hedging relationship was discontinued. The $225 million notional restructured interest
rate swap was subsequently accounted for as an economic hedge and the gain or loss on the
instrument is recognized in earnings.
As a result of these interest rate swaps, we pay an average floating rate, which fluctuates
semi-annually, based on LIBOR. The average floating rate to be paid by us as of March 31, 2010 was
less than 1%. The average fixed rate to be received by us as of March 31, 2010 was 2.0%
Commodity Risks
We are subject to market risks with respect to commodities because our ability to recover
increased costs through higher pricing may be limited by the competitive environment in which we
operate. Our principal commodities risks relate to our purchases of aluminum, corn (for high
fructose corn syrup), natural gas (for use in processing and packaging), PET and fuel.
We utilize commodities forward contracts and supplier pricing agreements to hedge the risk of
adverse movements in commodity prices for limited time periods for certain commodities. The fair
market value of these contracts as of March 31, 2010, was a net asset of $8 million.
As of March 31, 2010, the impact to net income of a 10% change (up or down) in market prices
of these commodities is estimated to be an increase or decrease of approximately $16 million on an
annual basis.
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Item 4.
Controls and Procedures.
Based on evaluation of the effectiveness of our disclosure controls and procedures (as defined
in Rule 13a-15(e) of the Exchange Act) our management, including our Chief Executive Officer and
Chief Financial Officer, has concluded that, as of March 31, 2010, our disclosure controls and
procedures are effective to (i) provide reasonable assurance that information required to be
disclosed in the Exchange Act filings is recorded, processed, summarized and reported within the
time periods specified by the Securities and Exchange Commission’s rules and forms, and (ii) ensure
that information required to be disclosed by us in the reports we file or submit under the Exchange
Act is accumulated and communicated to our management, including the Chief Executive Officer and
Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
No change in our internal control over financial reporting (as defined in Rule 13a-15(f) of
the Exchange Act) occurred during the quarter that materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
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Item 1.
Legal Proceedings.
Information regarding legal proceedings is incorporated by reference from Note 13 of the Notes
to our Unaudited Condensed Consolidated Financial Statements.
Item 1A.
Risk Factors.
There have been no material changes that we are aware of from the risk factors set forth in
Part I, Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2009.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
We repurchased 5.8 million shares of our common stock valued at approximately $202 million in
the first quarter of 2010. Our share repurchase program activity for each of the three months and
the quarter ended March 31, 2010 was as follows (in thousands, except per share data):
| Maximum Dollar | ||||||||||||||||
| Value of Shares | ||||||||||||||||
| Total Number of | that May Yet be | |||||||||||||||
| Shares Purchased | Purchased Under | |||||||||||||||
| as Part of Publicly | Publicly | |||||||||||||||
| Number of Shares | Average Price | Announced Plans | Announced Plans | |||||||||||||
| Period | Purchased (1) | Paid per Share | or Programs (2) | or Programs (2) | ||||||||||||
|
January 1, 2010 – January 31, 2010
|
— | $ | — | — | $ | 200,000 | ||||||||||
|
February 1, 2010 – February 28, 2010
|
— | — | — | 1,000,000 | ||||||||||||
|
March 1, 2010 – March 31, 2010
|
5,835 | 34.69 | 5,835 | 797,606 | ||||||||||||
|
|
||||||||||||||||
|
For the quarter ended March 31, 2010
|
5,835 | $ | 34.69 | 5,835 | $ | 797,606 | ||||||||||
|
|
||||||||||||||||
| (1) | Represents number of shares purchased in open-market transactions pursuant to our publicly announced repurchase program. | |
| (2) | Represents cumulative number of shares purchased and dollar value remaining under previously announced share repurchase authorizations by the Board of Directors (“the Board”). As previously announced, on November 20, 2009, the Board authorized the repurchase of up to $200 million of the Company’s outstanding common stock during 2010, 2011 and 2012. On February 24, 2010, the Board approved the repurchase of up to an additional $800 million of the Company’s outstanding common stock, bringing the total aggregate share repurchase authorization up to $1 billion. On March 11, 2010, pursuant to authority granted by the Board, the Company’s Audit Committee authorized the Company to attempt to effect up to $1 billion in share repurchases during 2010 if prevailing market conditions permit. The repurchase authorization noted above is also subject to certain repurchase parameters, including a maximum price per share. As a result, there can be no assurance that the Company will be able to execute its share repurchase program up to the authorized levels during 2010. |
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Item 6.
Exhibits.
| 2.1 | Separation and Distribution Agreement between Cadbury Schweppes plc and Dr Pepper Snapple Group, Inc. and, solely for certain provisions set forth therein, Cadbury plc, dated as of May 1, 2008 (filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K (filed on May 5, 2008) and incorporated herein by reference). | |
| 3.1 | Amended and Restated Certificate of Incorporation of Dr Pepper Snapple Group, Inc. (filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K (filed on May 12, 2008) and incorporated herein by reference). | |
| 3.2 | Amended and Restated By-Laws of Dr Pepper Snapple Group, Inc. (filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K (filed on July 16, 2009) and incorporated herein by reference). | |
| 4.1 | Indenture, dated April 30, 2008, between Dr Pepper Snapple Group, Inc. and Wells Fargo Bank, N.A. (filed an Exhibit 4.1 to the Company’s Current Report on Form 8-K (filed on May 1, 2008) and incorporated herein by reference). | |
| 4.2 | Form of 6.12% Senior Notes due 2013 (filed as Exhibit 4.2 to the Company’s Current Report on Form 8-K (filed on May 1, 2008) and incorporated herein by reference). | |
| 4.3 | Form of 6.82% Senior Notes due 2013 (filed as Exhibit 4.3 to the Company’s Current Report on Form 8-K (filed on May 1, 2008) and incorporated herein by reference). | |
| 4.4 | Form of 7.45% Senior Notes due 2013 (filed as Exhibit 4.4 to the Company’s Current Report on Form 8-K (filed on May 1, 2008) and incorporated herein by reference). | |
| 4.5 | Registration Rights Agreement, dated April 30, 2008, between Dr Pepper Snapple Group, Inc., J.P. Morgan Securities Inc., Banc of America Securities LLC, Goldman, Sachs & Co., Morgan Stanley & Co. Incorporated, UBS Securities LLC, BNP Paribas Securities Corp., Mitsubishi UFJ Securities International plc, Scotia Capital (USA) Inc., SunTrust Robinson Humphrey, Inc., Wachovia Capital Markets, LLC and TD Securities (USA) LLC (filed as Exhibit 4.5 to the Company’s Current Report on Form 8-K (filed on May 1, 2008) and incorporated herein by reference). | |
| 4.6 | Supplemental Indenture, dated May 7, 2008, among Dr Pepper Snapple Group, Inc., the subsidiary guarantors named therein and Wells Fargo Bank, N.A., as trustee (filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K (filed on May 12, 2008) and incorporated herein by reference). | |
| 4.7 | Second Supplemental Indenture dated March 17, 2009, to be effective as of December 31, 2008, among Splash Transport, Inc., as a subsidiary guarantor, Dr Pepper Snapple Group, Inc., and Wells Fargo Bank, N.A., as trustee (filed as Exhibit 4.8 to the Company’s Annual Report on Form 10-K (filed on March 26, 2009) and incorporated herein by reference). | |
| 4.8 | Registration Rights Agreement Joinder, dated May 7, 2008, by the subsidiary guarantors named therein (filed as Exhibit 4.2 to the Company’s Current Report on Form 8-K (filed on May 12, 2008) and incorporated herein by reference). | |
| 4.9 | Third Supplemental Indenture, dated October 19, 2009, among 234DP Aviation, LLC, as a subsidiary guarantor; Dr Pepper Snapple Group, Inc., and Wells Fargo Bank, N.A., as trustee (filed as Exhibit 4.9 to the Company’s Quarterly Report on Form 10-Q (filed November 5, 2009) and incorporated herein by reference). | |
| 4.10 | Indenture, dated as of December 15, 2009, between Dr Pepper Snapple Group, Inc. and Wells Fargo Bank, N.A., as trustee (filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K (filed on December 23, 2009) and incorporated herein by reference). | |
| 4.11 | First Supplemental Indenture, dated as of December 21, 2009, among Dr Pepper Snapple Group, Inc., the guarantors party thereto and Wells Fargo Bank, N.A., as trustee (filed as Exhibit 4.2 to the Company’s Current Report on Form 8-K (filed on December 23, 2009) and incorporated herein by reference). | |
| 4.12 | 1.70% Senior Notes due 2011 (in global form) (filed as Exhibit 4.3 to the Company’s Current Report on Form 8-K (filed on December 23, 2009) and incorporated herein by reference). | |
| 4.13 | 2.35% Senior Notes due 2012 (in global form) (filed as Exhibit 4.4 to the Company’s Current Report on Form 8-K (filed on December 23, 2009) and incorporated herein by reference). |
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Table of Contents
| 10.1* | Transition Services Agreement between Cadbury Schweppes plc and Dr Pepper Snapple Group, Inc., dated as of May 1, 2008. | |
| 10.2* | Tax Sharing and Indemnification Agreement between Cadbury Schweppes plc and Dr Pepper Snapple Group, Inc. and, solely for the certain provision set forth therein, Cadbury plc, dated as of May 1, 2008. | |
| 10.3* | Employee Matters Agreement between Cadbury Schweppes plc and Dr Pepper Snapple Group, Inc. and, solely for certain provisions set forth therein, Cadbury plc, dated as of May 1, 2008. | |
| 12.1* | Computation of Ratio of Earnings to Fixed Charges. | |
| 31.1* | Certification of Chief Executive Officer of Dr Pepper Snapple Group, Inc. pursuant to Rule 13a-14(a) or 15d-14(a) promulgated under the Exchange Act . | |
| 31.2* | Certification of Chief Financial Officer of Dr Pepper Snapple Group, Inc. pursuant to Rule 13a-14(a) or 15d-14(a) promulgated under the Exchange Act. | |
| 32.1** | Certification of Chief Executive Officer of Dr Pepper Snapple Group, Inc. pursuant to Rule 13a-14(b) or 15d-14(b) promulgated under the Exchange Act, and Section 1350 of Chapter 63 of Title 18 of the United States Code. | |
| 32.2** | Certification of Chief Financial Officer of Dr Pepper Snapple Group, Inc. pursuant to Rule 13a-14(b) or 15d-14(b) promulgated under the Exchange Act, and Section 1350 of Chapter 63 of Title 18 of the United States Code. | |
| 101* | The following financial information from Dr Pepper Snapple Group, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2010, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Statements of Operations for the three months ended March 31, 2010 and 2009, (ii) Condensed Consolidated Balance Sheets as of March 31, 2010 and December 31, 2009, (iii) Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2010 and 2009, and (iv) the Notes to Condensed Consolidated Financial Statements, tagged as blocks of text. |
| * | Filed herewith. | |
| ** | Furnished herewith. |
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SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Dr Pepper Snapple Group, Inc. | ||||||
|
|
||||||
|
|
By: | /s/ John O. Stewart | ||||
|
|
||||||
|
|
Name: | John O. Stewart | ||||
|
|
Title: | Executive Vice President and Chief Financial Officer | ||||
Date: May 6, 2010
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TABLE OF CONTENTS
Part I Financial InformationItem 1. Financial Statements (unaudited)Item 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II Other InformationItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 6. Exhibits