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
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 | 98-0517725 | |
| (State or other jurisdiction of | (I.R.S. employer | |
| incorporation or organization) | identification number) | |
| 5301 Legacy Drive, Plano, Texas | 75024 | |
| (Address of principal executive offices) | (Zip code) |
(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 Securities
Exchange Act of 1934.
| Large Accelerated Filer þ | Accelerated Filer o | Non-Accelerated Filer o | Smaller Reporting Company o | |||
|
(Do not check if a smaller reporting company)
|
||||||
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 October 25, 2010, there were 227,092,120 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 and Nine Months Ended September 30, 2010 and 2009
(Unaudited, in millions, except per share data)
Item 1.
Financial Statements (Unaudited).
| For the | For the | |||||||||||||||
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
|
Net sales
|
$ | 1,457 | $ | 1,434 | $ | 4,224 | $ | 4,175 | ||||||||
|
Cost of sales
|
600 | 579 | 1,689 | 1,706 | ||||||||||||
|
|
||||||||||||||||
|
Gross profit
|
857 | 855 | 2,535 | 2,469 | ||||||||||||
|
Selling, general and administrative expenses
|
564 | 547 | 1,682 | 1,596 | ||||||||||||
|
Depreciation and amortization
|
32 | 29 | 95 | 84 | ||||||||||||
|
Other operating expense (income), net
|
1 | 7 | 1 | (45 | ) | |||||||||||
|
|
||||||||||||||||
|
Income from operations
|
260 | 272 | 757 | 834 | ||||||||||||
|
Interest expense
|
31 | 51 | 94 | 158 | ||||||||||||
|
Interest income
|
— | (1 | ) | (2 | ) | (3 | ) | |||||||||
|
Other income, net
|
(2 | ) | (20 | ) | (7 | ) | (25 | ) | ||||||||
|
|
||||||||||||||||
|
Income before provision for income taxes and equity in earnings of
unconsolidated subsidiaries
|
231 | 242 | 672 | 704 | ||||||||||||
|
Provision for income taxes
|
87 | 92 | 257 | 265 | ||||||||||||
|
|
||||||||||||||||
|
Income before equity in earnings of unconsolidated subsidiaries
|
144 | 150 | 415 | 439 | ||||||||||||
|
Equity in earnings of unconsolidated subsidiaries, net of tax
|
— | 1 | 1 | 2 | ||||||||||||
|
|
||||||||||||||||
|
Net income
|
$ | 144 | $ | 151 | $ | 416 | $ | 441 | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Earnings per common share:
|
||||||||||||||||
|
Basic
|
$ | 0.61 | $ | 0.59 | $ | 1.70 | $ | 1.73 | ||||||||
|
Diluted
|
0.60 | 0.59 | 1.68 | 1.73 | ||||||||||||
|
|
||||||||||||||||
|
Weighted average common shares outstanding:
|
||||||||||||||||
|
Basic
|
238.0 | 254.2 | 245.1 | 254.2 | ||||||||||||
|
Diluted
|
240.4 | 255.5 | 247.3 | 255.0 | ||||||||||||
|
|
||||||||||||||||
|
Cash dividends declared per common share
|
$ | 0.25 | $ | — | $ | 0.65 | $ | — | ||||||||
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 September 30, 2010 and December 31, 2009
(Unaudited, in millions except share and per share data)
| September 30, | December 31, | |||||||
| 2010 | 2009 | |||||||
|
Assets
|
||||||||
|
Current assets:
|
||||||||
|
Cash and cash equivalents
|
$ | 224 | $ | 280 | ||||
|
Accounts receivable:
|
||||||||
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Trade, net
|
527 | 540 | ||||||
|
Other
|
31 | 32 | ||||||
|
Inventories
|
283 | 262 | ||||||
|
Deferred tax assets
|
58 | 53 | ||||||
|
Prepaid expenses and other current assets
|
176 | 112 | ||||||
|
|
||||||||
|
Total current assets
|
1,299 | 1,279 | ||||||
|
Property, plant and equipment, net
|
1,123 | 1,109 | ||||||
|
Investments in unconsolidated subsidiaries
|
11 | 9 | ||||||
|
Goodwill
|
2,984 | 2,983 | ||||||
|
Other intangible assets, net
|
2,693 | 2,702 | ||||||
|
Other non-current assets
|
541 | 543 | ||||||
|
Non-current deferred tax assets
|
139 | 151 | ||||||
|
|
||||||||
|
Total assets
|
$ | 8,790 | $ | 8,776 | ||||
|
|
||||||||
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Liabilities and Stockholders’ Equity
|
||||||||
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Current liabilities:
|
||||||||
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Accounts payable and accrued expenses
|
$ | 947 | $ | 850 | ||||
|
Deferred revenue
|
36 | — | ||||||
|
Income taxes payable
|
1 | 4 | ||||||
|
|
||||||||
|
Total current liabilities
|
984 | 854 | ||||||
|
Long-term obligations
|
2,571 | 2,960 | ||||||
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Non-current deferred tax liabilities
|
1,083 | 1,038 | ||||||
|
Non-current deferred revenue
|
843 | — | ||||||
|
Other non-current liabilities
|
724 | 737 | ||||||
|
|
||||||||
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Total liabilities
|
6,205 | 5,589 | ||||||
|
|
||||||||
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Commitments and contingencies
|
||||||||
|
|
||||||||
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Stockholders’ equity:
|
||||||||
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Preferred stock, $.01 par value, 15,000,000 shares authorized, no shares issued
|
— | — | ||||||
|
Common stock, $.01 par value, 800,000,000 shares authorized, 229,446,161 and
254,109,047 shares issued and outstanding for 2010 and 2009, respectively
|
2 | 3 | ||||||
|
Additional paid-in capital
|
2,277 | 3,156 | ||||||
|
Retained earnings
|
346 | 87 | ||||||
|
Accumulated other comprehensive loss
|
(40 | ) | (59 | ) | ||||
|
|
||||||||
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Total stockholders’ equity
|
2,585 | 3,187 | ||||||
|
|
||||||||
|
Total liabilities and stockholders’ equity
|
$ | 8,790 | $ | 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 Nine Months Ended September 30, 2010 and 2009
(Unaudited, in millions)
| For the | ||||||||
| Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2010 | 2009 | |||||||
|
Operating activities:
|
||||||||
|
Net income
|
$ | 416 | $ | 441 | ||||
|
Adjustments to reconcile net income to net cash provided by operations:
|
||||||||
|
Depreciation expense
|
137 | 121 | ||||||
|
Amortization expense
|
28 | 30 | ||||||
|
Amortization of deferred financing costs
|
4 | 14 | ||||||
|
Amortization of deferred revenue
|
(21 | ) | — | |||||
|
Employee stock-based compensation expense
|
21 | 13 | ||||||
|
Deferred income taxes
|
44 | 48 | ||||||
|
Gain on disposal of intangible assets
|
— | (63 | ) | |||||
|
Other, net
|
15 | 4 | ||||||
|
Changes in assets and liabilities:
|
||||||||
|
Trade and other accounts receivable
|
9 | — | ||||||
|
Inventories
|
(21 | ) | (11 | ) | ||||
|
Other
current and non-current assets
|
(62 | ) | (8 | ) | ||||
|
Accounts payable and accrued expenses
|
73 | 127 | ||||||
|
Income taxes payable
|
2 | 11 | ||||||
|
Current and
non-current deferred revenue
|
899 | — | ||||||
|
Other non-current liabilities
|
(5 | ) | (26 | ) | ||||
|
|
||||||||
|
Net cash provided by operating activities
|
1,539 | 701 | ||||||
|
Investing activities:
|
||||||||
|
Purchases of property, plant and equipment
|
(170 | ) | (223 | ) | ||||
|
Investments in unconsolidated subsidiaries
|
(1 | ) | — | |||||
|
Purchases of intangible assets
|
— | (7 | ) | |||||
|
Proceeds from disposals of property, plant and equipment
|
16 | 5 | ||||||
|
Proceeds from disposals of intangible assets
|
— | 68 | ||||||
|
Other, net
|
4 | — | ||||||
|
|
||||||||
|
Net cash used in investing activities
|
(151 | ) | (157 | ) | ||||
|
Financing activities:
|
||||||||
|
Repayment of senior unsecured credit facility
|
(405 | ) | (480 | ) | ||||
|
Repurchase of shares of common stock
|
(910 | ) | — | |||||
|
Dividends paid
|
(136 | ) | — | |||||
|
Other, net
|
4 | (3 | ) | |||||
|
|
||||||||
|
Net cash used in financing activities
|
(1,447 | ) | (483 | ) | ||||
|
Cash and cash equivalents — net change from:
|
||||||||
|
Operating, investing and financing activities
|
(59 | ) | 61 | |||||
|
Currency translation
|
3 | 7 | ||||||
|
Cash and cash equivalents at beginning of period
|
280 | 214 | ||||||
|
|
||||||||
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Cash and cash equivalents at end of period
|
$ | 224 | $ | 282 | ||||
|
|
||||||||
|
Supplemental cash flow disclosures of non-cash investing and financing activities:
|
||||||||
|
Capital expenditures included in accounts payable and accrued expenses
|
$ | 36 | $ | 15 | ||||
|
Non-cash transfer of assets
|
— | 4 | ||||||
|
Supplemental cash flow disclosures:
|
||||||||
|
Interest paid
|
$ | 67 | $ | 87 | ||||
|
Income taxes paid
|
191 | 162 | ||||||
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)
(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)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Recently Issued Accounting Updates
In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard
Update (“ASU”) 2010-06,
Improving Disclosures about Fair Value Measurements
(“ASU 2010-06”). The
new standard addresses, among other things, guidance regarding activity in Level 3 fair value
measurements. Portions of ASU 2010-06 that relate to the Level 3 activity disclosures are effective
for the first interim or annual reporting period beginning after December 15, 2010. The Company will provide the
required disclosures beginning with the Company’s Quarterly
Report on Form 10-Q for the period ending
March 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 September 30, 2010, and December 31, 2009, consisted of the following (in
millions):
| September 30, | December 31, | |||||||
| 2010 | 2009 | |||||||
|
Raw materials
|
$ | 96 | $ | 105 | ||||
|
Work in process
|
4 | 4 | ||||||
|
Finished goods
|
222 | 193 | ||||||
|
|
||||||||
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Inventories at FIFO cost
|
322 | 302 | ||||||
|
Reduction to LIFO cost
|
(39 | ) | (40 | ) | ||||
|
|
||||||||
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Inventories
|
$ | 283 | $ | 262 | ||||
|
|
||||||||
5
Table of Contents
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. Goodwill and Other Intangible Assets
Changes in the carrying amount of goodwill for the nine months ended September 30, 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 | 1 | |||||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Balance as of September 30, 2010
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Goodwill
|
1,732 | 1,220 | 180 | 32 | 3,164 | |||||||||||||||
|
|
||||||||||||||||||||
|
Accumulated impairment losses
|
— | — | (180 | ) | — | (180 | ) | |||||||||||||
|
|
||||||||||||||||||||
|
|
$ | 1,732 | $ | 1,220 | $ | — | $ | 32 | $ | 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 September 30, 2010,
and December 31, 2009, are as follows (in millions):
| September 30, 2010 | December 31, 2009 | |||||||||||||||||||||||
| Gross | Accumulated | Net | Gross | Accumulated | Net | |||||||||||||||||||
| Amount | Amortization | Amount | Amount | Amortization | Amount | |||||||||||||||||||
|
Intangible assets with indefinite
lives:
|
||||||||||||||||||||||||
|
Brands
|
$ | 2,654 | $ | — | $ | 2,654 | $ | 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 | (54 | ) | 22 | 76 | (45 | ) | 31 | ||||||||||||||||
|
Bottler agreements
|
22 | (19 | ) | 3 | 21 | (17 | ) | 4 | ||||||||||||||||
|
Distributor rights
|
2 | (2 | ) | — | 2 | (2 | ) | — | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total
|
$ | 2,791 | $ | (98 | ) | $ | 2,693 | $ | 2,788 | $ | (86 | ) | $ | 2,702 | ||||||||||
|
|
||||||||||||||||||||||||
As of September 30, 2010, the weighted average useful lives of intangible assets with finite
lives were 10 years, 9 years and 9 years for brands, customer relationships and bottler agreements,
respectively. Amortization expense for intangible assets was $4 million and $12 million for each of
the three and nine months ended September 30, 2010 and 2009, respectively.
6
Table of Contents
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(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 | ||||
|
Year
|
Amortization | |||
| Expense | ||||
|
Remaining three months for the year ending December 31, 2010
|
$ | 5 | ||
|
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 nine months ended September 30, 2010.
4. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consisted of the following as of September 30, 2010, and
December 31, 2009 (in millions):
| September 30, | December 31, | |||||||
| 2010 | 2009 | |||||||
|
Trade accounts payable
|
$ | 315 | $ | 252 | ||||
|
Customer rebates and incentives
|
215 | 209 | ||||||
|
Accrued compensation
|
94 | 126 | ||||||
|
Insurance reserves
|
80 | 68 | ||||||
|
Interest accrual and interest rate swap liability
|
54 | 24 | ||||||
|
Dividends payable
|
60 | 38 | ||||||
|
Other current liabilities
|
129 | 133 | ||||||
|
|
||||||||
|
Accounts payable and accrued expenses
|
$ | 947 | $ | 850 | ||||
|
|
||||||||
5. Long-term obligations
The following table summarizes the Company’s long-term obligations as of September 30, 2010,
and December 31, 2009 (in millions):
| September 30, | December 31, | |||||||
| 2010 | 2009 | |||||||
|
Senior unsecured notes
(1)
|
$ | 2,560 | $ | 2,542 | ||||
|
Revolving credit facility
|
— | 405 | ||||||
|
Less – current portion
|
— | — | ||||||
|
|
||||||||
|
Subtotal
|
2,560 | 2,947 | ||||||
|
Long-term capital lease obligations
|
11 | 13 | ||||||
|
|
||||||||
|
Long-term obligations
|
$ | 2,571 | $ | 2,960 | ||||
|
|
||||||||
| (1) |
The carrying amount includes an adjustment 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”),
including the impact of de-designations of the fair value hedges associated with the
2012 Notes in March and September 2010. The impact of the adjustment increased the
carrying amount $10 million as of September 30, 2010 and decreased the carrying amount
$8 million as of December 31, 2009. 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)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(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. The Company issued $850 million in 2009,
as described in the section “
Senior Unsecured Notes — The
2011 and 2012 Notes”
below. As a result, $650 million remained authorized to be issued as of
September 30, 2010.
During the nine months ended September 30, 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 indentures 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 September 30, 2010 and December 31, 2009, respectively. Up to $75 million of the
Revolver is available for the issuance of letters of credit, of which $14 million and
$41 million were utilized as of September 30, 2010, and December 31, 2009, respectively.
Balances available for additional borrowings and letters of credit were $486 million and
$61 million, respectively, as of September 30, 2010.
|
Borrowings under the senior unsecured credit facility bear interest at a floating rate per
annum based upon the London Interbank Offered Rate (“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. There were no borrowings during the three months ended
September 30, 2010. The average interest rate was 4.88% for the three months ended September 30,
2009. The average interest rate was 2.25% and 4.84% for the nine months ended September 30, 2010
and 2009, respectively. Interest expense was $2 million and $21 million for the three months ended
September 30, 2010 and 2009, respectively. Interest expense was $4 million and $69 million for the
nine months ended September 30, 2010 and 2009, respectively. Amortization of deferred financing
costs of $1 million and $4 million for the three months ended September 30, 2010 and 2009,
respectively, was included in interest expense. For the nine months ended September 30, 2010 and
2009, amortization of deferred financing costs of $2 million and $11 million was included in
interest expense, respectively.
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. There were minimal unused commitment fees for the three months ended
September 30, 2010. The Company incurred $1 million in unused commitment fees for the three months
ended September 30, 2009 and the nine months ended September 30, 2010 and 2009.
Principal amounts outstanding under the Revolver are due and payable in full at maturity in
2013.
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.
8
Table of Contents
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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; 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 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 September 30, 2010 and December
31, 2009, the Company was in compliance with all financial covenant requirements.
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 2.04% for the three and nine months ended September
30, 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 $1 million for the nine months ended September 30,
2010. There was no interest expense for the three months ended September 30, 2010. As a result of
changes in fair value prior to the termination of the economic hedge in September 2010, the
Company recorded a gain of $3 million and $6 million, which reduced interest expense for
the three and nine months ended September 30, 2010, respectively. Interest expense included $1
million of deferred financing costs associated with the 2011 and 2012 Notes for the nine months
ended September 30, 2010. For the three months ended September 30, 2010, there was minimal
amortization of deferred financing costs.
The Company utilizes interest rate swaps designated as fair value and economic 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 September 30, 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 6.81% for each of the three and nine month periods ended September
30, 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 and $30 million for the
three months ended September 30, 2010 and 2009, respectively, and $88 million for the nine months
ended September 30, 2010 and 2009. Amortization of deferred financing costs of $1 million for the
nine months ended September 30, 2010 and 2009 was included in interest expense. For the three
months ended September 30, 2010 and 2009, there was minimal amortization of deferred financing
costs.
The indenture governing the 2013, 2018, and 2038 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 September 30, 2010 and
December 31, 2009, the Company was in compliance with all covenant requirements.
Capital Lease Obligations
Long-term capital lease obligations totaled $11 million and $13 million as of September 30,
2010, and December 31, 2009, respectively. Current obligations related to the Company’s capital
leases were $3 million as of September 30, 2010, and December 31, 2009, and were included as a
component of accounts payable and accrued expenses.
9
Table of Contents
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Letters
of Credit Facility
Effective
June 2010, the Company entered into a Letter of Credit Facility in
addition to the portion of the Revolver reserved for issuance of
letters of credit. Under the Letter of Credit Facility, $65 million
is available for the issuance of letters of credit, of which $35
million was utilized as of September 30, 2010. Balances available for
additional letters of credit was $30 million as of September 30, 2010.
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.
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, they 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 for a cash flow hedge, 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. 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. An interest rate swap with a notional amount of $500 million matured in March
2009. As of September 30, 2009, DPS maintained other interest rate swaps with a notional amount of
$1.2 billion with a maturity date of December 31, 2009. 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.
There were no interest rate swaps in place for the nine months ended September 30, 2010, that
qualified for hedge accounting as cash flow hedges under U.S. GAAP.
10
Table of Contents
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 nine months ended September 30, 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 upon the issuance
of the 2011 and 2012 Notes, and 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 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.
Effective September 21, 2010, the remaining $225 million notional interest rate swap linked to
the 2012 Notes was terminated and settled, thus 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 remaining $225 million notional amount. The $4 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 of these changes, the Company had a fair value hedge with a notional amount of
$400 million remaining as of September 30, 2010 linked to the 2011 Notes.
As of September 30, 2010, the carrying value of the 2011 and 2012 Notes increased by $10
million, which includes the $5 million adjustment, net of amortization, that resulted from the
de-designation events 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 Hedges
In addition to derivative 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 $750 million interest rate swap in December 2009,
leaving the remaining $405 million 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
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 first quarter. The
Company terminated this interest rate swap instrument once the outstanding balance under the
Revolver was fully repaid during the first quarter of 2010. The gain or loss on the instrument was
recognized in earnings during the period the instrument was outstanding in 2010.
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 was recognized in earnings during
the period the instrument was outstanding in 2010. Effective September 21, 2010, the interest rate
swap was terminated and settled.
11
Table of Contents
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Foreign Exchange
Cash Flow Hedges
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 nine months ended September 30, 2010 and 2009, the Company utilized foreign exchange
forward contracts designated as cash flow hedges to manage the 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 27 months. As of September 30, 2010 and 2009, the
Company had outstanding foreign exchange forward contracts with notional amounts of $95 million and
$29 million, respectively.
Economic Hedges
The Company’s Canadian business has various transactions denominated and settled in U.S.
Dollars, a currency different from the functional currency of the Canadian business. These
transactions are subject to exposure from movements in exchange rates. During the second quarter of
2010, the Company entered into foreign exchange forward contracts not designated as cash flow
hedges to manage foreign currency exposure and economically hedge the exposure from movements in
exchange rates. These foreign exchange contracts, carried at fair value, have maturities between 4
and 15 months. As of September 30, 2010, the Company had outstanding foreign exchange forward
contracts with notional amounts of $12 million. There were no derivative instruments in place in
2009 to economically hedge the exposure from movements in exchange rates.
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 nine months ended September 30, 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”).
12
Table of Contents
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(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 September 30, 2010,
and December 31, 2009 (in millions):
| September 30, | 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 | |||||||
|
Interest rate swap contracts
|
Other non-current assets | 1 | — | |||||||||
|
Derivative instruments not designated as
hedging
instruments under U.S. GAAP:
|
||||||||||||
|
Commodity futures
|
Prepaid expenses and other current assets | 9 | 1 | |||||||||
|
Commodity futures
|
Other non-current assets | 3 | 9 | |||||||||
|
|
||||||||||||
|
Total assets
|
$ | 19 | $ | 16 | ||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Liabilities:
|
||||||||||||
|
Derivative instruments designated as
hedging
instruments under U.S. GAAP:
|
||||||||||||
|
Foreign exchange forward contracts
|
Accounts payable and accrued expenses | $ | — | $ | 2 | |||||||
|
Interest rate swap contracts
|
Other non-current liabilities | — | 14 | |||||||||
|
Derivative instruments not designated
as hedging
instruments under U.S. GAAP:
|
||||||||||||
|
Interest rate swap contracts
|
Accounts payable and accrued expenses | — | 3 | |||||||||
|
Commodity futures
|
Accounts payable and accrued expenses | 3 | — | |||||||||
|
Commodity futures
|
Other non-current liabilities | 1 | — | |||||||||
|
|
||||||||||||
|
Total liabilities
|
$ | 4 | $ | 19 | ||||||||
|
|
||||||||||||
13
Table of Contents
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 and nine months ended September 30, 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
September 30, 2010:
|
||||||||||
|
Foreign exchange forward contract
|
$ | (2 | ) | $ | — | Cost of sales | ||||
|
|
||||||||||
|
Total
|
$ | (2 | ) | $ | — | |||||
|
|
||||||||||
|
|
||||||||||
|
For the nine months ended
September 30, 2010:
|
||||||||||
|
Foreign exchange forward contract
|
$ | (1 | ) | $ | 3 | Cost of sales | ||||
|
|
||||||||||
|
Total
|
$ | (1 | ) | $ | 3 | |||||
|
|
||||||||||
|
|
||||||||||
|
For the three months ended
September 30, 2009:
|
||||||||||
|
Interest rate swap contracts
|
$ | (4 | ) | $ | (9 | ) | Interest expense | |||
|
Foreign exchange forward contract
|
(3 | ) | (1 | ) | Cost of sales | |||||
|
|
||||||||||
|
Total
|
$ | (7 | ) | $ | (10 | ) | ||||
|
|
||||||||||
|
|
||||||||||
|
For the nine months ended
September 30, 2009:
|
||||||||||
|
Interest rate swap contracts
|
$ | (12 | ) | $ | (29 | ) | Interest expense | |||
|
Foreign exchange forward contract
|
(5 | ) | (1 | ) | Cost of sales | |||||
|
|
||||||||||
|
Total
|
$ | (17 | ) | $ | (30 | ) | ||||
|
|
||||||||||
There was no hedge ineffectiveness recognized in net income for the three and nine months
ended September 30, 2010 and 2009 with respect to derivative instruments designated as cash flow
hedges.
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 and nine months ended
September 30, 2010. The following table presents the impact of derivative instruments designated as
fair value hedging instruments under U.S. GAAP to the unaudited Condensed Consolidated Statement of
Operations for the three and nine months ended September 30, 2010 (in millions):
| Amount of Gain (Loss) | Location of Gain (Loss) | |||||
| Recognized in Net Income on | recognized in Net Income on | |||||
| Derivative | Derivative | |||||
|
For the three months ended
September 30, 2010:
|
||||||
|
Interest rate swap contracts
|
$ | 2 | Interest Expense | |||
|
|
||||||
|
Total
|
$ | 2 | ||||
|
|
||||||
|
|
||||||
|
For the nine months ended
September 30, 2010:
|
||||||
|
Interest rate swap contracts
|
$ | 5 | Interest Expense | |||
|
|
||||||
|
Total
|
$ | 5 | ||||
|
|
||||||
There were no derivative instruments designated as fair value hedges during the first nine months of 2009.
14
Table of Contents
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(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 and nine months ended September 30, 2010 and 2009 (in millions):
| Amount of Gain (Loss) | Location of Gain (Loss) | |||||
| Recognized in Income | Recognized in Income | |||||
|
For the three months ended
September 30, 2010:
|
||||||
|
Interest rate swap contracts
|
$ | 3 | Interest expense | |||
|
Commodity futures
|
3 | Cost of sales | ||||
|
Commodity futures
|
1 | Selling, general and administrative expenses | ||||
|
|
||||||
|
Total
|
$ | 7 | ||||
|
|
||||||
|
|
||||||
|
For the nine months ended
September 30, 2010:
|
||||||
|
Interest rate swap contracts
|
$ | 6 | Interest expense | |||
|
Foreign exchange forward contracts
|
1 | Cost of sales | ||||
|
Commodity futures
|
(4 | ) | Cost of sales | |||
|
Commodity futures
|
1 | Selling, general and administrative expenses | ||||
|
|
||||||
|
Total
|
$ | 4 | ||||
|
|
||||||
|
|
||||||
|
For the three months ended
September 30, 2009:
|
||||||
|
Commodity futures
|
$ | 3 | Cost of sales | |||
|
Commodity futures
|
(1 | ) | Selling, general and administrative expenses | |||
|
|
||||||
|
Total
|
$ | 2 | ||||
|
|
||||||
|
|
||||||
|
For the nine months ended
September 30, 2009:
|
||||||
|
Commodity futures
|
$ | 1 | Cost of sales | |||
|
Commodity futures
|
— | Selling, general and administrative expenses | ||||
|
|
||||||
|
Total
|
$ | 1 | ||||
|
|
||||||
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.
15
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DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 September 30, 2010, and December 31, 2009 (in millions):
| September 30, | December 31, | |||||||
| 2010 | 2009 | |||||||
|
Other non-current assets:
|
||||||||
|
Long-term receivables from Kraft
(1)
|
$ | 411 | $ | 402 | ||||
|
Deferred financing costs, net
|
19 | 23 | ||||||
|
Customer incentive programs
|
81 | 84 | ||||||
|
Other
|
30 | 34 | ||||||
|
|
||||||||
|
Other non-current assets
|
$ | 541 | $ | 543 | ||||
|
|
||||||||
|
Other non-current liabilities:
|
||||||||
|
Long-term payables due to Kraft
(1)
|
$ | 111 | $ | 115 | ||||
|
Liabilities for unrecognized tax benefits and other tax related items
|
550 | 534 | ||||||
|
Long-term pension and postretirement liability
|
35 | 49 | ||||||
|
Other
|
28 | 39 | ||||||
|
|
||||||||
|
Other non-current liabilities
|
$ | 724 | $ | 737 | ||||
|
|
||||||||
(1) Amounts represent receivables from or payables to Kraft under the Tax Indemnity Agreement entered
into in connection with the Company’s separation. Refer to Note 8 for further discussion.
8. Income Taxes
The effective tax rates for the three months ended September 30, 2010 and 2009 were 37.7% and
38.0%, respectively. The decrease in the effective tax rate for the three months ended September
30, 2010, was primarily driven by
separation related costs in the prior period that did not recur.
The effective tax rates for the nine months ended September 30, 2010 and 2009 were 38.2% and
37.6%, respectively. The increase in the effective tax rate for the nine months ended September 30,
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 1.9%, respectively.
The impact of the Canadian provincial tax rate change was partially
offset by other items including separation related costs in the prior
period that did not recur.
The Company’s Canadian deferred tax assets as of September 30, 2010 included a separation
related balance of $131 million that was offset by a liability due to Kraft of $115 million driven
by the Tax Indemnity Agreement. Anticipated legislation in Canada could result in a future partial
write-down 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 $411 million. This balance increased by $9 million during the nine
months ended September 30, 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.
16
Table of Contents
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 September 30, 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 | ||||||||||
|
Commodity futures
|
$ | — | $ | 12 | $ | — | ||||||
|
Interest rate swaps
|
— | 7 | — | |||||||||
|
|
||||||||||||
|
Total assets
|
$ | — | $ | 19 | $ | — | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Commodity futures
|
$ | — | $ | 4 | $ | — | ||||||
|
|
||||||||||||
|
Total liabilities
|
$ | — | $ | 4 | $ | — | ||||||
|
|
||||||||||||
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 | $ | — | ||||||
|
|
||||||||||||
17
Table of Contents
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 September 30, 2010, and December 31, 2009, the Company 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 and nine months ended September 30, 2010.
The estimated fair values of other financial liabilities not measured at fair value on a
recurring basis as of September 30, 2010, and December 31, 2009, are as follows (in millions):
| September 30, 2010 | December 31, 2009 | |||||||||||||||
| Carrying Amount | Fair Value | Carrying Amount | Fair Value | |||||||||||||
|
Long term debt – 2011 Notes
|
$ | 405 | $ | 404 | $ | 396 | $ | 400 | ||||||||
|
Long term debt – 2012 Notes
|
455 | 463 | 446 | 451 | ||||||||||||
|
Long term debt – 2013 Notes
|
250 | 280 | 250 | 273 | ||||||||||||
|
Long term debt – 2018 Notes
|
1,200 | 1,501 | 1,200 | 1,349 | ||||||||||||
|
Long term debt – 2038 Notes
|
250 | 333 | 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 September 30, 2010, and December 31,
2009, were 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.
10. Employee Benefit Plans
The following table sets forth the components of pension benefit costs for the three and nine
months ended September 30, 2010 and 2009 (in millions):
| For the Three Months | For the Nine Months | |||||||||||||||
| Ended September 30, | Ended September 30, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
|
Service cost
|
$ | — | $ | — | $ | 1 | $ | — | ||||||||
|
Interest cost
|
3 | 4 | 10 | 12 | ||||||||||||
|
Expected return on assets
|
(3 | ) | (3 | ) | (11 | ) | (9 | ) | ||||||||
|
Recognition of actuarial loss
|
1 | 1 | 3 | 3 | ||||||||||||
|
Settlement loss
|
1 | — | 4 | — | ||||||||||||
|
|
||||||||||||||||
|
Net periodic benefit costs
|
$ | 2 | $ | 2 | $ | 7 | $ | 6 | ||||||||
|
|
||||||||||||||||
The estimated prior service cost and transition asset that will be amortized from AOCL into
periodic benefit cost for defined pension benefit plans in 2010 are not significant.
18
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DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
There were no significant net periodic benefit costs for the U.S. postretirement benefit plans
for either of the three month periods ended September 30, 2010 or 2009. Total net periodic benefit
costs for the U.S. postretirement benefit plans were $1 million for each of the nine month periods
ended September 30, 2010 and 2009. The estimated prior service cost, transition obligation and
estimated net loss that will be amortized from AOCL into periodic benefit cost for postretirement
plans in 2010 are not significant.
During 2010, the total amount of lump sum payments made to participants
of certain U.S. defined pension plans exceeded the estimated annual
interest and service costs for 2010. As a
result, non-cash settlement charges of $1 million and $4 million were recognized for the three and
nine month periods ended September 30, 2010, respectively.
The Company contributed $5 million and $11 million to its pension plans during the three and
nine months ended September 30, 2010, respectively, and expects to contribute an additional $1
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 and $2 million for the three month period ended September 30, 2010 and
2009, respectively. Multi-employer contributions were approximately $3 million and $4 million for
the nine month periods ended September 30, 2010 and 2009, respectively. Additionally, during the
third quarter of 2009, a trustee-approved mass withdrawal under one multi-employer plan was
triggered, which resulted in additional expense of approximately $3 million for the three and nine
months ended September 30, 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 and nine months ended
September 30, 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 | For the Nine Months | |||||||||||||||
| Ended September 30, | Ended September 30, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
|
Total stock-based compensation expense
|
$ | 8 | $ | 5 | $ | 21 | $ | 13 | ||||||||
|
Income tax benefit recognized in the income statement
|
(3 | ) | (2 | ) | (8 | ) | (5 | ) | ||||||||
|
|
||||||||||||||||
|
Net stock-based compensation expense
|
$ | 5 | $ | 3 | $ | 13 | $ | 8 | ||||||||
|
|
||||||||||||||||
The table below summarizes stock option activity for the nine months ended September 30, 2010:
| Weighted | Weighted Average | Aggregate | ||||||||||||||
| Average | Remaining Contractual | Intrinsic Value | ||||||||||||||
| Stock Options | Exercise Price | Term (Years) | (in millions) | |||||||||||||
|
Outstanding as of December 31, 2009
|
2,178,211 | $ | 18.97 | 8.79 | $ | 20 | ||||||||||
|
Granted
|
855,403 | 32.36 | ||||||||||||||
|
Exercised
|
(241,719 | ) | 20.38 | |||||||||||||
|
Forfeited or expired
|
(102,920 | ) | 18.86 | |||||||||||||
|
|
||||||||||||||||
|
Outstanding as of September 30, 2010
|
2,688,975 | 23.11 | 8.46 | 33 | ||||||||||||
|
|
||||||||||||||||
|
Exercisable as of September 30, 2010
|
859,517 | 21.20 | 7.89 | 12 | ||||||||||||
|
|
||||||||||||||||
As of September 30, 2010, there was $8 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 2.17 years.
19
Table of Contents
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The table below summarizes RSU activity for the nine months ended September 30, 2010:
| Weighted | Weighted Average | Aggregate | ||||||||||||||
| Average Grant | Remaining Contractual | Intrinsic Value | ||||||||||||||
| RSUs | Date Fair Value | Term (Years) | (in millions) | |||||||||||||
|
Outstanding as of December 31, 2009
|
2,688,551 | $ | 17.43 | 1.91 | $ | 76 | ||||||||||
|
Granted
|
983,222 | 31.95 | ||||||||||||||
|
Vested
|
(53,072 | ) | 20.55 | |||||||||||||
|
Forfeited
|
(135,273 | ) | 19.65 | |||||||||||||
|
|
||||||||||||||||
|
Outstanding as of September 30, 2010
|
3,483,428 | 21.40 | 1.55 | 124 | ||||||||||||
|
|
||||||||||||||||
Under the terms of the Company’s RSU agreements, individual RSU holders are entitled to dividend equivalent units in
the event of a dividend declaration. Under the agreements, unvested RSU awards, as well as the associated dividend
equivalents, are forfeitable. As of September 30, 2010, there were 54,409 dividend equivalent units outstanding,
which will vest at the time that the underlying RSU vests.
As of September 30, 2010, there was $42 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 2.06 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 | For the Nine Months | |||||||||||||||
| Ended September 30, | Ended September 30, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
|
Basic EPS:
|
||||||||||||||||
|
Net income
|
$ | 144 | $ | 151 | $ | 416 | $ | 441 | ||||||||
|
Weighted average common shares outstanding
|
238.0 | 254.2 | 245.1 | 254.2 | ||||||||||||
|
Earnings per common share — basic
|
$ | 0.61 | $ | 0.59 | $ | 1.70 | $ | 1.73 | ||||||||
|
|
||||||||||||||||
|
Diluted EPS:
|
||||||||||||||||
|
Net income
|
$ | 144 | $ | 151 | $ | 416 | $ | 441 | ||||||||
|
Weighted average common shares outstanding
|
238.0 | 254.2 | 245.1 | 254.2 | ||||||||||||
|
Effect of dilutive securities:
|
||||||||||||||||
|
Stock options, RSUs, and dividend
equivalent units
|
2.4 | 1.3 | 2.2 | 0.8 | ||||||||||||
|
|
||||||||||||||||
|
Weighted average common shares
outstanding and common stock equivalents
|
240.4 | 255.5 | 247.3 | 255.0 | ||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Earnings per common share — diluted
|
$ | 0.60 | $ | 0.59 | $ | 1.68 | $ | 1.73 | ||||||||
Stock options, RSUs and dividend equivalent units totaling 0.2 million shares were excluded
from the diluted weighted average shares outstanding for the three months ended September 30, 2010,
and 0.6 million shares were excluded from the diluted weighted average shares outstanding for the
nine months ended September 30, 2010, as they were not dilutive. Weighted average options and RSUs
totaling 1.1 million shares were excluded from the diluted weighted average shares outstanding for
the three and nine months ended September 30, 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.
20
Table of Contents
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On February 24, 2010, the Board authorized an increase in the total aggregate share repurchase
authorization from $200 million up to $1 billion. Subsequent to this approval, the Company
repurchased and retired 9.6 million shares of common stock valued at approximately $353 million and
25.2 million shares of common stock valued at approximately $910 million in the three and nine
months ended September 30, 2010, respectively. These amounts were recorded as a reduction of
equity, primarily additional paid-in capital.
On July 12, 2010, the Board authorized the repurchase of an additional $1 billion of our
outstanding common stock over the next three years, which additional
authorization may be used to repurchase shares of the Company’s
common stock after the funds authorized on February 24, 2010 have
been utilized.
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 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. Discovery and class certification
proceedings are complete. In
August 2010, the District Court stayed the case for six months pending a referral to the U.S. Food and
Drug Administration (“FDA”) by the District Court in a similar, but unrelated, case pending in New
Jersey federal court. In September 2010, the FDA declined the referral in the unrelated
New Jersey case. Snapple has moved to re-open the case and decide class certification.
|
||
| • |
In 2007, the attorneys in the Holk case also filed an action in the United States
District Court, Southern District of New York on behalf of plaintiffs, Evan Weiner and
Timothy McCausland. Discovery and class certification proceedings are complete. This
District Court did not stay this case pending the referral to the FDA in the unrelated New
Jersey case. In August 2010, the District Court denied the plaintiffs’ motion to certify the
case as a class action. The plaintiffs’ time to appeal the denial of class certification has
expired. Snapple has filed a motion for summary judgment on the
plaintiffs’ remaining
individual claims.
|
||
| • |
In 2009, Snapple Beverage Corp. was sued by Frances Von Koenig in the United States
District Court, Eastern District of California. A similar suit filed by Guy Caldwell in
2009 against DPS in the United States District Court, Eastern District of
California, was consolidated with the Van Koenig case. In May 2010, Snapple’s motion to
dismiss was denied in part and granted in part with leave to amend. Plaintiffs filed
an amended complaint. Snapple has filed a further motion to dismiss. In August 2010, the
District Court stayed the case for six months pending a referral to the FDA by the District Court in a similar,
but unrelated, case pending in New Jersey federal court. In September 2010, the FDA
declined the referral in the unrelated New Jersey case. Either party can now move to
re-open the case for the court to decide the motion to dismiss.
|
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.
21
Table of Contents
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 parties have
reached a tentative settlement in the case, pursuant to which the Company would pay $4.25 million,
which amount was accrued as of June 30, 2010. The settlement is subject to the satisfaction of the
following conditions: (i) court approval and (ii) execution of an acceptable settlement agreement.
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.
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 is approximately $350,000.
14. Comprehensive Income
The following table provides a summary of the total comprehensive income, including the
Company’s proportionate share of equity method investees’ other comprehensive income, for the three
and nine months ended September 30, 2010 and 2009 (in millions):
| For the | For the | |||||||||||||||
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
|
|
||||||||||||||||
|
Consolidated net income
|
$ | 144 | $ | 151 | $ | 416 | $ | 441 | ||||||||
|
Other comprehensive income:
|
||||||||||||||||
|
Net foreign currency translation
|
9 | 1 | 11 | 13 | ||||||||||||
|
Net change in pension liability
|
9 | — | 6 | 2 | ||||||||||||
|
Net change
in cash flow hedges
|
(2 | ) | 2 | 2 | 8 | |||||||||||
|
|
||||||||||||||||
|
Total comprehensive income
|
$ | 160 | $ | 154 | $ | 435 | $ | 464 | ||||||||
|
|
||||||||||||||||
22
Table of Contents
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A rollforward of the amounts included in AOCL, net of taxes, is shown below for the nine
months ended September 30, 2010 and the year ended December 31, 2009 (in millions):
| Accumulated | ||||||||||||||||
| Foreign | Other | |||||||||||||||
| Currency | Change in | Cash Flow | Comprehensive | |||||||||||||
| Translation | Pension Liability | Hedges | Loss | |||||||||||||
|
|
||||||||||||||||
|
Balance at December 31, 2008
|
$ | (34 | ) | $ | (52 | ) | $ | (20 | ) | $ | (106 | ) | ||||
|
Changes in fair value
|
22 | 7 | (20 | ) | 9 | |||||||||||
|
Reclassification to earnings
|
— | — | 38 | 38 | ||||||||||||
|
|
||||||||||||||||
|
Balance at December 31, 2009
|
$ | (12 | ) | $ | (45 | ) | $ | (2 | ) | $ | (59 | ) | ||||
|
Changes in fair value
|
11 | 6 | (1 | ) | 16 | |||||||||||
|
Reclassification to earnings
|
— | — | 3 | 3 | ||||||||||||
|
|
||||||||||||||||
|
Balance at September 30, 2010
|
$ | (1 | ) | $ | (39 | ) | $ | — | $ | (40 | ) | |||||
|
|
||||||||||||||||
15. Investments in Unconsolidated Subsidiaries
The Company maintains certain investments accounted for under the cost method of accounting
that have a zero cost basis in companies that it does not control and for which it does not have
the ability to exercise significant influence over operating and financial policies. During the
third quarter of 2010, the Company contributed $650,000 to one of those investments, Hydrive
Energy, LLC, whose co-founder and significant equity holder sits on the Company’s Board.
As a result of this contribution, the Company increased its interest from 13.4% as of December 31,
2009 to 20.4%, thereby causing the investment to be accounted for under the equity method of
accounting. There was no retroactive impact to retained earnings as a result of the change in the
method of accounting.
16. Segments
As of September 30, 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 concentrates, syrup and finished beverages.
|
Segment results are based on management reports. Net sales and SOP are the significant
financial measures used to assess the operating performance of the Company’s operating segments.
23
Table of Contents
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Information about the Company’s operations by operating segment for the three and nine
months ended September 30, 2010 and 2009 is as follows (in millions):
| For the | For the | |||||||||||||||
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
|
Segment Results – Net Sales
|
||||||||||||||||
|
Beverage Concentrates
|
$ | 278 | $ | 260 | $ | 837 | $ | 784 | ||||||||
|
Packaged Beverages
|
1,082 | 1,077 | 3,102 | 3,126 | ||||||||||||
|
Latin America Beverages
|
97 | 97 | 285 | 265 | ||||||||||||
|
|
||||||||||||||||
|
Net sales
|
$ | 1,457 | $ | 1,434 | $ | 4,224 | $ | 4,175 | ||||||||
|
|
||||||||||||||||
| For the | For the | |||||||||||||||
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
|
Segment Results – SOP
|
||||||||||||||||
|
Beverage Concentrates
|
$ | 182 | $ | 158 | $ | 535 | $ | 492 | ||||||||
|
Packaged Beverages
|
136 | 168 | 413 | 445 | ||||||||||||
|
Latin America Beverages
|
6 | 18 | 31 | 41 | ||||||||||||
|
|
||||||||||||||||
|
Total SOP
|
324 | 344 | 979 | 978 | ||||||||||||
|
Unallocated corporate costs
|
63 | 65 | 221 | 189 | ||||||||||||
|
Other operating expense (income), net
|
1 | 7 | 1 | (45 | ) | |||||||||||
|
|
||||||||||||||||
|
Income from operations
|
260 | 272 | 757 | 834 | ||||||||||||
|
Interest expense, net
|
31 | 50 | 92 | 155 | ||||||||||||
|
Other income, net
|
(2 | ) | (20 | ) | (7 | ) | (25 | ) | ||||||||
|
|
||||||||||||||||
|
Income before provision for income taxes
and equity in earnings of unconsolidated
subsidiaries
|
$ | 231 | $ | 242 | $ | 672 | $ | 704 | ||||||||
|
|
||||||||||||||||
17. 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.
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.
Under the new agreements, DPS received a one-time nonrefundable cash payment of $900 million.
The new agreements have an initial period of 20 years with automatic 20-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.
18. Agreement with The Coca-Cola Company
On June 7, 2010, DPS agreed to license certain brands to The Coca-Cola Company (“Coke”) on
completion of Coke’s proposed acquisition of Coca-Cola Enterprises’ (“CCE”) North American Bottling
Business.
Under the new licensing agreements, Coke will distribute Dr Pepper and Canada Dry in the U.S.
territories where these brands are currently distributed by CCE. The same will apply to Canada Dry
and C Plus in Canada.
As part of the U.S. licensing agreement, Coke has agreed to offer Dr
Pepper and Diet Dr Pepper in its local fountain accounts.
The new agreements will have an initial period of 20 years with automatic
20-year renewal periods, and will require Coke to meet certain performance conditions.
24
Table of Contents
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Under
a
separate agreement, Coke has agreed to include Dr Pepper and Diet Dr
Pepper brands in its Freestyle fountain program. The Freestyle
fountain program agreement will have a period
of twenty years.
Additionally, in certain U.S. territories where it has a distribution
footprint, DPS will begin selling certain owned and licensed brands, including Canada Dry,
Schweppes, Squirt and Cactus Cooler, that were previously distributed by CCE.
Under this arrangement, DPS will receive a one-time nonrefundable cash payment of $715
million. As no competent or verifiable evidence of fair value could be determined for the
significant elements in this arrangement, the arrangement will be recorded net. The total cash
consideration of $715 million will be recorded as deferred revenue and recognized as net sales
ratably over the estimated 25-year life of the customer relationship.
On
October 4, 2010, the Company received the cash payment of $715
million, completed the licensing of those brands to Coke following
Coke’s acquisition of CCE’s North American Bottling
Business and executed separate agreements
pursuant to which Coke will offer Dr Pepper and Diet Dr Pepper in local fountain accounts and the Freestyle fountain program.
19. 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 indentures 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 (collectively, the “Non-Guarantors”) guarantee the Notes.
The following schedules present the financial information for the three and nine months ended
September 30, 2010 and 2009, and as of September 30, 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 September 30, 2010 | ||||||||||||||||||||
| Parent | Guarantors | Non-Guarantors | Eliminations | Total | ||||||||||||||||
| (in millions) | ||||||||||||||||||||
|
Net sales
|
$ | — | $ | 1,326 | $ | 136 | $ | (5 | ) | $ | 1,457 | |||||||||
|
Cost of sales
|
— | 543 | 62 | (5 | ) | 600 | ||||||||||||||
|
|
||||||||||||||||||||
|
Gross profit
|
— | 783 | 74 | — | 857 | |||||||||||||||
|
Selling, general and administrative
expenses
|
— | 506 | 58 | — | 564 | |||||||||||||||
|
Depreciation and amortization
|
— | 30 | 2 | — | 32 | |||||||||||||||
|
Other operating expense (income), net
|
— | 2 | (1 | ) | — | (1 | ) | |||||||||||||
|
|
||||||||||||||||||||
|
Income from operations
|
— | 245 | 15 | — | 260 | |||||||||||||||
|
Interest expense
|
31 | 20 | — | (20 | ) | 31 | ||||||||||||||
|
Interest income
|
(19 | ) | — | (1 | ) | 20 | — | |||||||||||||
|
Other income, net
|
(3 | ) | — | 1 | — | (2 | ) | |||||||||||||
|
|
||||||||||||||||||||
|
(Loss) Income before provision
for income taxes and equity in
earnings of subsidiaries
|
(9 | ) | 225 | 15 | — | 231 | ||||||||||||||
|
Provision for income taxes
|
(4 | ) | 89 | 2 | — | 87 | ||||||||||||||
|
|
||||||||||||||||||||
|
(Loss) Income before equity in
earnings of subsidiaries
|
(5 | ) | 136 | 13 | — | 144 | ||||||||||||||
|
Equity in earnings of consolidated
subsidiaries
|
149 | 13 | — | (162 | ) | — | ||||||||||||||
|
Equity in earnings of unconsolidated
subsidiaries, net of tax
|
— | — | — | — | — | |||||||||||||||
|
|
||||||||||||||||||||
|
Net income
|
$ | 144 | $ | 149 | $ | 13 | $ | (162 | ) | $ | 144 | |||||||||
|
|
||||||||||||||||||||
25
Table of Contents
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| Condensed Consolidating Statements of Operations | ||||||||||||||||||||
| For the Three Months Ended September 30, 2009 | ||||||||||||||||||||
| Parent | Guarantors | Non-Guarantors | Eliminations | Total | ||||||||||||||||
| (in millions) | ||||||||||||||||||||
|
Net sales
|
$ | — | $ | 1,298 | $ | 136 | $ | — | $ | 1,434 | ||||||||||
|
Cost of sales
|
— | 524 | 55 | — | 579 | |||||||||||||||
|
|
||||||||||||||||||||
|
Gross profit
|
— | 774 | 81 | — | 855 | |||||||||||||||
|
Selling, general and administrative
expenses
|
— | 500 | 47 | — | 547 | |||||||||||||||
|
Depreciation and amortization
|
— | 28 | 1 | — | 29 | |||||||||||||||
|
Other operating expense (income), net
|
— | 3 | 4 | — | 7 | |||||||||||||||
|
|
||||||||||||||||||||
|
Income from operations
|
— | 243 | 29 | — | 272 | |||||||||||||||
|
Interest expense
|
54 | 22 | — | (25 | ) | 51 | ||||||||||||||
|
Interest income
|
(25 | ) | — | (1 | ) | 25 | (1 | ) | ||||||||||||
|
Other income, net
|
(19 | ) | (19 | ) | 18 | — | (20 | ) | ||||||||||||
|
|
||||||||||||||||||||
|
Income before provision for
income taxes and equity in
earnings of subsidiaries
|
(10 | ) | 240 | 12 | — | 242 | ||||||||||||||
|
Provision for income taxes
|
(11 | ) | 100 | 3 | — | 92 | ||||||||||||||
|
|
||||||||||||||||||||
|
Income before equity in earnings
of subsidiaries
|
1 | 140 | 9 | — | 150 | |||||||||||||||
|
Equity in earnings of consolidated
subsidiaries
|
150 | 10 | — | (160 | ) | — | ||||||||||||||
|
Equity in earnings of unconsolidated
subsidiaries, net of tax
|
— | — | 1 | — | 1 | |||||||||||||||
|
|
||||||||||||||||||||
|
Net income
|
$ | 151 | $ | 150 | $ | 10 | $ | (160 | ) | $ | 151 | |||||||||
|
|
||||||||||||||||||||
| Condensed Consolidating Statements of Operations | ||||||||||||||||||||
| For the Nine Months Ended September 30, 2010 | ||||||||||||||||||||
| Parent | Guarantors | Non-Guarantors | Eliminations | Total | ||||||||||||||||
| (in millions) | ||||||||||||||||||||
|
Net sales
|
$ | — | $ | 3,848 | $ | 398 | $ | (22 | ) | $ | 4,224 | |||||||||
|
Cost of sales
|
— | 1,526 | 185 | (22 | ) | 1,689 | ||||||||||||||
|
|
||||||||||||||||||||
|
Gross profit
|
— | 2,322 | 213 | — | 2,535 | |||||||||||||||
|
Selling, general and administrative
expenses
|
— | 1,525 | 157 | — | 1,682 | |||||||||||||||
|
Depreciation and amortization
|
— | 91 | 4 | — | 95 | |||||||||||||||
|
Other operating expense (income), net
|
— | 1 | — | — | 1 | |||||||||||||||
|
|
||||||||||||||||||||
|
Income from operations
|
— | 705 | 52 | — | 757 | |||||||||||||||
|
Interest expense
|
94 | 59 | — | (59 | ) | 94 | ||||||||||||||
|
Interest income
|
(57 | ) | (1 | ) | (3 | ) | 59 | (2 | ) | |||||||||||
|
Other income, net
|
(8 | ) | (1 | ) | 2 | — | (7 | ) | ||||||||||||
|
|
||||||||||||||||||||
|
(Loss) Income before provision
for income taxes and equity in
earnings of subsidiaries
|
(29 | ) | 648 | 53 | — | 672 | ||||||||||||||
|
Provision for income taxes
|
(14 | ) | 252 | 19 | — | 257 | ||||||||||||||
|
|
||||||||||||||||||||
|
(Loss) Income before equity in
earnings of subsidiaries
|
(15 | ) | 396 | 34 | — | 415 | ||||||||||||||
|
Equity in earnings of consolidated
subsidiaries
|
431 | 35 | — | (466 | ) | — | ||||||||||||||
|
Equity in earnings of unconsolidated
subsidiaries, net of tax
|
— | — | 1 | — | 1 | |||||||||||||||
|
|
||||||||||||||||||||
|
Net income
|
$ | 416 | $ | 431 | $ | 35 | $ | (466 | ) | $ | 416 | |||||||||
|
|
||||||||||||||||||||
26
Table of Contents
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| Condensed Consolidating Statements of Operations | ||||||||||||||||||||
| For the Nine Months Ended September 30, 2009 | ||||||||||||||||||||
| Parent | Guarantors | Non-Guarantors | Eliminations | Total | ||||||||||||||||
| (in millions) | ||||||||||||||||||||
|
Net sales
|
$ | — | $ | 3,811 | $ | 364 | $ | — | $ | 4,175 | ||||||||||
|
Cost of sales
|
— | 1,553 | 153 | — | 1,706 | |||||||||||||||
|
|
||||||||||||||||||||
|
Gross profit
|
— | 2,258 | 211 | — | 2,469 | |||||||||||||||
|
Selling, general and administrative
expenses
|
— | 1,463 | 133 | — | 1,596 | |||||||||||||||
|
Depreciation and amortization
|
— | 81 | 3 | — | 84 | |||||||||||||||
|
Other operating expense (income), net
|
— | (43 | ) | (2 | ) | — | (45 | ) | ||||||||||||
|
|
||||||||||||||||||||
|
Income from operations
|
— | 757 | 77 | — | 834 | |||||||||||||||
|
Interest expense
|
161 | 92 | — | (95 | ) | 158 | ||||||||||||||
|
Interest income
|
(95 | ) | — | (3 | ) | 95 | (3 | ) | ||||||||||||
|
Other income, net
|
(25 | ) | (19 | ) | 19 | — | (25 | ) | ||||||||||||
|
|
||||||||||||||||||||
|
Income before provision for
income taxes and equity in
earnings of subsidiaries
|
(41 | ) | 684 | 61 | — | 704 | ||||||||||||||
|
Provision for income taxes
|
(25 | ) | 279 | 11 | — | 265 | ||||||||||||||
|
|
||||||||||||||||||||
|
Income before equity in earnings
of subsidiaries
|
(16 | ) | 405 | 50 | — | 439 | ||||||||||||||
|
Equity in earnings of consolidated
subsidiaries
|
457 | 52 | — | (509 | ) | — | ||||||||||||||
|
Equity in earnings of unconsolidated
subsidiaries, net of tax
|
— | — | 2 | — | 2 | |||||||||||||||
|
|
||||||||||||||||||||
|
Net income
|
$ | 441 | $ | 457 | $ | 52 | $ | (509 | ) | $ | 441 | |||||||||
|
|
||||||||||||||||||||
27
Table of Contents
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| Condensed Consolidating Balance Sheets | ||||||||||||||||||||
| As of September 30, 2010 | ||||||||||||||||||||
| Parent | Guarantors | Non-Guarantors | Eliminations | Total | ||||||||||||||||
| (in millions) | ||||||||||||||||||||
|
Current assets:
|
||||||||||||||||||||
|
Cash and cash equivalents
|
$ | — | $ | 166 | $ | 58 | $ | — | $ | 224 | ||||||||||
|
Accounts receivable:
|
||||||||||||||||||||
|
Trade, net
|
— | 469 | 58 | — | 527 | |||||||||||||||
|
Other
|
2 | 17 | 12 | — | 31 | |||||||||||||||
|
Related party receivable
|
12 | 7 | — | (19 | ) | — | ||||||||||||||
|
Inventories
|
— | 254 | 29 | — | 283 | |||||||||||||||
|
Deferred tax assets
|
— | 52 | 6 | — | 58 | |||||||||||||||
|
Prepaid expenses and other current assets
|
93 | 55 | 28 | — | 176 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total current assets
|
107 | 1,020 | 191 | (19 | ) | 1,299 | ||||||||||||||
|
Property, plant and equipment, net
|
— | 1,050 | 73 | — | 1,123 | |||||||||||||||
|
Investments in consolidated subsidiaries
|
3,566 | 485 | — | (4,051 | ) | — | ||||||||||||||
|
Investments in unconsolidated
subsidiaries
|
1 | — | 10 | — | 11 | |||||||||||||||
|
Goodwill
|
— | 2,961 | 23 | — | 2,984 | |||||||||||||||
|
Other intangible assets, net
|
— | 2,612 | 81 | — | 2,693 | |||||||||||||||
|
Long-term receivable, related parties
|
2,824 | 1,552 | 111 | (4,487 | ) | — | ||||||||||||||
|
Other non-current assets
|
430 | 103 | 8 | — | 541 | |||||||||||||||
|
Non-current deferred tax assets
|
— | — | 139 | — | 139 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total assets
|
$ | 6,928 | $ | 9,783 | $ | 636 | $ | (8,557 | ) | $ | 8,790 | |||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Current liabilities:
|
||||||||||||||||||||
|
Accounts payable and accrued expenses
|
$ | 120 | $ | 758 | $ | 69 | $ | — | $ | 947 | ||||||||||
|
Related party payable
|
— | 12 | 7 | (19 | ) | — | ||||||||||||||
|
Deferred revenue
|
— | 34 | 2 | — | 36 | |||||||||||||||
|
Income taxes payable
|
— | — | 1 | — | 1 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total current liabilities
|
120 | 804 | 79 | (19 | ) | 984 | ||||||||||||||
|
Long-term obligations to third parties
|
2,560 | 11 | — | — | 2,571 | |||||||||||||||
|
Long-term obligations to related parties
|
1,552 | 2,934 | 1 | (4,487 | ) | — | ||||||||||||||
|
Non-current deferred tax liabilities
|
— | 1,066 | 17 | — | 1,083 | |||||||||||||||
|
Non-current deferred revenue
|
— | 804 | 39 | — | 843 | |||||||||||||||
|
Other non-current liabilities
|
111 | 598 | 15 | — | 724 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total liabilities
|
4,343 | 6,217 | 151 | (4,506 | ) | 6,205 | ||||||||||||||
|
|
||||||||||||||||||||
|
Total equity
|
2,585 | 3,566 | 485 | (4,051 | ) | 2,585 | ||||||||||||||
|
|
||||||||||||||||||||
|
Total liabilities and
stockholders’ equity
|
$ | 6,928 | $ | 9,783 | $ | 636 | $ | (8,557 | ) | $ | 8,790 | |||||||||
|
|
||||||||||||||||||||
28
Table of Contents
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| Condensed Consolidating Balance Sheets | ||||||||||||||||||||
| 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 | |||||||||||||||
|
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 | |||||||||
|
|
||||||||||||||||||||
29
Table of Contents
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| Condensed Consolidating Statements of Cash Flows | ||||||||||||||||||||
| For the Nine Months Ended September 30, 2010 | ||||||||||||||||||||
| Parent | Guarantors | Non-Guarantors | Eliminations | Total | ||||||||||||||||
| (in millions) | ||||||||||||||||||||
|
Operating activities:
|
||||||||||||||||||||
|
Net cash provided by operating activities
|
$ | (75 | ) | $ | 1,561 | $ | 53 | $ | — | $ | 1,539 | |||||||||
|
Investing activities:
|
||||||||||||||||||||
|
Purchases of property, plant and equipment
|
— | (154 | ) | (16 | ) | — | (170 | ) | ||||||||||||
|
Investments in unconsolidated subsidiaries
|
(1 | ) | — | — | — | (1 | ) | |||||||||||||
|
Proceeds from disposals of property, plant
and equipment
|
— | 16 | — | — | 16 | |||||||||||||||
|
Return of capital
|
— | 38 | (38 | ) | — | — | ||||||||||||||
|
Issuance of related party notes receivable
|
— | (1,118 | ) | (15 | ) | 1,133 | — | |||||||||||||
|
Proceeds from repayment of related party
notes receivable
|
405 | — | — | (405 | ) | — | ||||||||||||||
|
Other, net
|
— | 4 | — | — | 4 | |||||||||||||||
|
|
||||||||||||||||||||
|
Net cash used in investing activities
|
404 | (1,214 | ) | (69 | ) | 728 | (151 | ) | ||||||||||||
|
Financing activities:
|
||||||||||||||||||||
|
Proceeds from related party long-term debt
|
1,118 | 15 | — | (1,133 | ) | — | ||||||||||||||
|
Proceeds from repayment of related party
long-term debt
|
— | 20 | — | (20 | ) | — | ||||||||||||||
|
Repayment of related party long-term debt
|
— | (405 | ) | (20 | ) | 425 | — | |||||||||||||
|
Repayment of senior unsecured credit facility
|
(405 | ) | — | — | — | (405 | ) | |||||||||||||
|
Repurchase of shares of common stock
|
(910 | ) | — | — | — | (910 | ) | |||||||||||||
|
Dividends paid
|
(136 | ) | — | — | — | (136 | ) | |||||||||||||
|
Other, net
|
4 | — | — | — | 4 | |||||||||||||||
|
|
||||||||||||||||||||
|
Net cash used in financing activities
|
(329 | ) | (370 | ) | (20 | ) | (728 | ) | (1,447 | ) | ||||||||||
|
Cash and cash equivalents — net change from:
|
||||||||||||||||||||
|
Operating, investing and financing activities
|
— | (23 | ) | (36 | ) | — | 59 | |||||||||||||
|
Currency translation
|
— | (2 | ) | 5 | — | 3 | ||||||||||||||
|
Cash and cash equivalents at beginning of
period
|
— | 191 | 89 | — | 280 | |||||||||||||||
|
|
||||||||||||||||||||
|
Cash and cash equivalents at end of period
|
$ | — | $ | 166 | $ | 58 | $ | — | $ | 224 | ||||||||||
|
|
||||||||||||||||||||
30
Table of Contents
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| Condensed Consolidating Statements of Cash Flows | ||||||||||||||||||||
| For the Nine Months Ended September 30, 2009 | ||||||||||||||||||||
| Parent | Guarantors | Non-Guarantors | Eliminations | Total | ||||||||||||||||
| (in millions) | ||||||||||||||||||||
|
Operating activities:
|
||||||||||||||||||||
|
Net cash (used in)
provided by operating
activities
|
$ | (133 | ) | $ | 790 | $ | 44 | $ | — | $ | 701 | |||||||||
|
Investing activities:
|
||||||||||||||||||||
|
Purchases of property, plant
and equipment
|
— | (214 | ) | (9 | ) | — | (223 | ) | ||||||||||||
|
Purchases of intangible assets
|
— | (7 | ) | — | — | (7 | ) | |||||||||||||
|
Proceeds from disposals of
property, plant and equipment
|
— | 5 | — | — | 5 | |||||||||||||||
|
Proceeds from disposals of
investments and other assets
|
— | 63 | 5 | — | 68 | |||||||||||||||
|
Issuance of notes receivable
|
— | (288 | ) | — | 288 | — | ||||||||||||||
|
Proceeds from repayment of
notes receivable
|
325 | — | — | (325 | ) | — | ||||||||||||||
|
|
||||||||||||||||||||
|
Net cash (used in)
provided by investing
activities
|
325 | (441 | ) | (4 | ) | (37 | ) | (157 | ) | |||||||||||
|
Financing activities:
|
||||||||||||||||||||
|
Proceeds from issuance of
long-term debt related to
guarantor/non-guarantor
|
288 | — | — | (288 | ) | — | ||||||||||||||
|
Repayment of related party
long-term debt
|
— | (325 | ) | — | 325 | — | ||||||||||||||
|
Repayment of senior unsecured
credit facility
|
(480 | ) | — | — | — | (480 | ) | |||||||||||||
|
Other, net
|
— | (3 | ) | — | — | (3 | ) | |||||||||||||
|
|
||||||||||||||||||||
|
Net cash provided by (used
in) financing activities
|
(192 | ) | (328 | ) | — | 37 | (483 | ) | ||||||||||||
|
Cash and cash
equivalents — net change from:
|
||||||||||||||||||||
|
Operating, investing and
financing activities
|
— | 21 | 40 | — | 61 | |||||||||||||||
|
Currency translation
|
— | — | 7 | — | 7 | |||||||||||||||
|
Cash and cash equivalents at
beginning of period
|
— | 145 | 69 | — | 214 | |||||||||||||||
|
|
||||||||||||||||||||
|
Cash and cash equivalents at
end of period
|
$ | — | $ | 166 | $ | 116 | $ | — | $ | 282 | ||||||||||
|
|
||||||||||||||||||||
31
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, labor matters 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 the names of 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.
Substantially all of our beverage concentrates are manufactured at our plant in St. Louis,
Missouri.
32
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, Mistic, 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 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 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, the
equivalent of 24 twelve ounce servings.
33
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 our sales
of concentrate cases.
Although net sales in our concentrate businesses are based on concentrate case sales, we
believe that bottler case sales are also a significant measure of our performance because they
measure sales of packaged beverages into retail channels.
Packaged Beverages Sales Volume
In our Packaged Beverages segment, we measure volume as case sales to customers. A case sale
represents a unit of measurement equal to 288 fluid ounces of packaged beverage sold by us. Case
sales include both our owned brands and certain brands licensed to and/or distributed by us.
Volume in Bottler Case Sales
In addition to sales volume, we measure volume in bottler case sales (“volume (BCS)”) as sales
of packaged beverages, in equivalent 288 fluid ounce cases, sold by us and our bottling partners to
retailers and independent distributors. Our contract manufacturing sales are not included or
reported as part of volume (BCS).
Bottler case sales, 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 $1,457 million for the three months ended September 30, 2010, an
increase of $23 million, or approximately 2%, from the three months ended September 30,
2009.
|
||
| • |
Net income for the three months ended September 30, 2010, was $144 million, compared
to $151 million for the year ago period, a decrease of $7 million, or approximately 5%.
|
||
| • |
Diluted earnings per share were $0.60 per share for the three months ended September
30, 2010, compared with $0.59 for the year ago period.
|
||
| • |
During the third quarter of 2010, our Board of Directors (the “Board”) declared a
dividend of $0.25 per share, payable on October 8, 2010, to shareholders of record on
September 20, 2010.
|
||
| • |
During the three and nine
months ended September 30, 2010, respectively, we repurchased 9.6
million and 25.2 million shares of our common stock valued at
approximately $353 million and $910 million.
|
||
| • |
DPS agreed to license certain brands to The Coca-Cola Company (“Coke”) as a result of
Coke’s acquisition of Coca-Cola Enterprises’ (“CCE”) North American Bottling Business in
October 2010. As part of the transaction, DPS received a one-time cash payment of $715
million in October 2010, which will be recorded as deferred revenue and recognized as
net sales ratably over the estimated 25-year life of the customer relationship.
|
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.”
34
Table of Contents
Three Months Ended September 30, 2010 Compared to Three Months Ended September 30, 2009
Consolidated Operations
The following table sets forth our unaudited consolidated results of operations for the three
months ended September 30, 2010 and 2009 (dollars in millions):
| For the Three Months Ended September 30, | ||||||||||||||||||||
| 2010 | 2009 | Percentage | ||||||||||||||||||
| Dollars | Percent | Dollars | Percent | Change | ||||||||||||||||
|
Net sales
|
$ | 1,457 | 100.0 | % | $ | 1,434 | 100.0 | % | 2 | % | ||||||||||
|
Cost of sales
|
600 | 41.2 | 579 | 40.4 | 4 | |||||||||||||||
|
|
||||||||||||||||||||
|
Gross profit
|
857 | 58.8 | 855 | 59.6 | NM | |||||||||||||||
|
Selling, general and administrative expenses
|
564 | 38.7 | 547 | 38.2 | 3 | |||||||||||||||
|
Depreciation and amortization
|
32 | 2.2 | 29 | 2.0 | 10 | |||||||||||||||
|
Other operating expense (income), net
|
1 | 0.1 | 7 | 0.5 | (86 | ) | ||||||||||||||
|
|
||||||||||||||||||||
|
Income from operations
|
260 | 17.8 | 272 | 18.9 | (4 | ) | ||||||||||||||
|
Interest expense
|
31 | 2.1 | 51 | 3.6 | (39 | ) | ||||||||||||||
|
Interest income
|
— | — | (1 | ) | (0.1 | ) | NM | |||||||||||||
|
Other income, net
|
(2 | ) | (0.2 | ) | (20 | ) | (1.4 | ) | (90 | ) | ||||||||||
|
|
||||||||||||||||||||
|
Income before provision for income taxes and equity in
earnings of unconsolidated subsidiaries
|
231 | 15.9 | 242 | 16.8 | (5 | ) | ||||||||||||||
|
Provision for income taxes
|
87 | 6.0 | 92 | 6.4 | (5 | ) | ||||||||||||||
|
|
||||||||||||||||||||
|
Income before equity in earnings of unconsolidated
subsidiaries
|
144 | 9.9 | 150 | 10.4 | (4 | ) | ||||||||||||||
|
Equity in earnings of unconsolidated subsidiaries, net
of tax
|
— | — | 1 | 0.1 | NM | |||||||||||||||
|
|
||||||||||||||||||||
|
Net income
|
$ | 144 | 9.9 | % | $ | 151 | 10.5 | % | (5 | )% | ||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Earnings per common share:
|
||||||||||||||||||||
|
Basic
|
$ | 0.61 | NM | $ | 0.59 | NM | 3 | % | ||||||||||||
|
Diluted
|
$ | 0.60 | NM | $ | 0.59 | NM | 2 | % | ||||||||||||
Volume.
Volume (BCS)
Volume.
Volume (BCS) increased 2% for the three months ended September 30, 2010, compared
with the three months ended September 30, 2009. In the U.S. and
Canada, volume increased 3% and in
Mexico and the Caribbean, volume decreased 3% compared with the year ago period. NCB and CSD
volume increased 5% and 1%, respectively. In CSDs, Crush increased 18% compared with the year ago
period due to expanded distribution and innovation. Dr Pepper volume increased by 2% compared with
the year ago period. Our “Core 4” brands (7UP, Sunkist soda, A&W and Canada Dry) were down 1%
compared to the year ago period as mid single-digit declines in Sunkist soda and 7UP were partially
offset by a double-digit increase in Canada Dry. Peñafiel volume
decreased 11% due to decreased
sales to third party distributors. In NCBs, 10% growth in Snapple was due to the successful restage
of the brand, the growth of value offerings and increased marketing. Additionally, a 7% increase in
Hawaiian Punch was partially offset by declines in third party NCB brands, such as AriZona.
Although volume (BCS) increased 2% for the three months ended September 30, 2010,
compared with the three months ended September 30, 2009, sales volume only increased 1% for the
same period as it includes the decline related to contract manufacturing, while volume (BCS) does
not.
Net Sales.
Net sales increased $23 million, or approximately 2%, for the three months ended
September 30, 2010, compared with the three months ended September 30, 2009. The increase was
primarily attributable to an increase in our NCB and CSD sales volumes, increases in our
concentrate pricing, $9 million in revenue recognized under the
PepsiCo license, and the favorable impact of changes in foreign
currency. These increases
were partially offset by an unfavorable product mix, a $15 million decline in contract manufacturing within our
Packaged Beverages segment and higher discounts.
Gross
Profit
. Gross profit increased $2 million for the three months
ended September 30, 2010, compared with the three months ended
September 30, 2009. Gross margin of 59% for the three months ended
September 30, 2010, was lower than the 60% gross margin for the three
months ended September 30, 2009, primarily due to $15 million of
higher expenses associated with labor, co-packing, unfavorable yield,
and an underabsorption of manufacturing overhead as a result of the
strike at our Williamson, New York manufacturing facility as we
continued to produce product and service customers during this work
stoppage, which ended on September 13, 2010. Other factors included
increased commodity costs, partially offset by ongoing supply chain
efficiencies.
35
Table of Contents
Income from Operations.
Income from operations decreased $12 million to $260 million for the
three months ended September 30, 2010, compared with the year ago period. The decrease was
attributable to factors affecting the $2 million increase in gross
profit offset by higher selling,
general and administrative (“SG&A”) expenses. SG&A
expenses increased by $17 million primarily due to higher
transportation costs, an
unfavorable comparison of the actuarial adjustments for certain
insurance plans and higher marketplace investments.
Interest Expense, Interest Income and Other Income, Net.
Interest expense decreased $20
million compared with the year ago period, reflecting the repayment of our senior unsecured Term
Loan A facility during December 2009. As a result of indemnity income associated with the Tax
Indemnity Agreement with Kraft, other income, net was $2 million for the three months ended
September 30, 2010. Other income, net was $20 million for
the three months ended September 30, 2009, which
includes $3 million related to indemnity income associated with the Tax Indemnity Agreement with
Kraft and an additional $16 million of one-time separation related items resulting from an audit
settlement during the third quarter of 2009.
Provision for Income Taxes.
The effective tax rates for the three months ended September 30,
2010 and 2009 were 37.7% and 38.0%, respectively. The decrease in the effective tax rate for the
three months ended September 30, 2010, was primarily driven by separation related costs in the
prior period that did not recur.
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 September 30, 2010 and 2009, as well as
the other amounts 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 | ||||||||
| September 30, | ||||||||
| 2010 | 2009 | |||||||
|
Segment Results — Net sales
|
||||||||
|
Beverage Concentrates
|
$ | 278 | $ | 260 | ||||
|
Packaged Beverages
|
1,082 | 1,077 | ||||||
|
Latin America Beverages
|
97 | 97 | ||||||
|
|
||||||||
|
Net sales
|
$ | 1,457 | $ | 1,434 | ||||
|
|
||||||||
|
|
||||||||
|
Segment Results — SOP
|
||||||||
|
Beverage Concentrates
|
$ | 182 | $ | 158 | ||||
|
Packaged Beverages
|
136 | 168 | ||||||
|
Latin America Beverages
|
6 | 18 | ||||||
|
|
||||||||
|
Total SOP
|
324 | 344 | ||||||
|
Unallocated corporate costs
|
63 | 65 | ||||||
|
Other operating expense (income), net
|
1 | 7 | ||||||
|
|
||||||||
|
Income from operations
|
260 | 272 | ||||||
|
Interest expense, net
|
31 | 50 | ||||||
|
Other income, net
|
(2 | ) | (20 | ) | ||||
|
|
||||||||
|
Income before provision for income taxes and
equity in earnings of unconsolidated
subsidiaries
|
$ | 231 | $ | 242 | ||||
|
|
||||||||
36
Table of Contents
Beverage Concentrates
The following table details our Beverage Concentrates segment’s net sales and SOP for the
three months ended September 30, 2010 and 2009 (in millions):
| For the | ||||||||||||
| Three Months Ended | ||||||||||||
| September 30, | Amount | |||||||||||
| 2010 | 2009 | Change | ||||||||||
|
Net sales
|
$ | 278 | $ | 260 | $ | 18 | ||||||
|
SOP
|
182 | 158 | 24 | |||||||||
Net sales increased $18 million, or approximately 7%, for the three months ended September 30,
2010, compared with the three months ended September 30, 2009. The increase was primarily due to
concentrate price increases, $9 million in revenue recognized under the PepsiCo license and a 3%
increase in concentrate case sales. Concentrate price increases, which were effective in January
2010, added an incremental $10 million to net sales during the three months ended September 30,
2010. The increase in net sales was partially offset by a higher discounts.
SOP increased $24 million, or approximately 15%, for the three months ended September 30,
2010, as compared with the year ago period, primarily driven by the
increase in net sales, as well
as a decrease in marketing spend and lower incentive compensation related costs.
Volume (BCS) increased 1% for the three
months ended September 30, 2010, as compared
with the year ago period. Dr. Pepper increased 3%, led by an increase in both regular and
Diet Dr Pepper, offset by decreases in the Dr Pepper Cherry line compared to the year ago period when it
was initially introduced. Crush volume increased by 19%, led by the launch of Cherry Crush in the first quarter
of 2010. These increases were partially offset by a double-digit decline in Squirt and Hawaiian Punch and a 5%
decline in our Core 4 brands, led by a double-digit decline in Sunkist soda and 7UP, partially offset by a high
single-digit increase in Canada Dry and a single-digit increase in
A&W. The decreases in Sunkist soda, 7UP, Squirt
and Hawaiian Punch were primarily driven by the repatriation of the brands to our Packaged Beverages segment as a
result of the PepsiCo licensing agreement.
Packaged Beverages
The following table details our Packaged Beverages segment’s net sales and SOP for the three
months ended September 30, 2010 and 2009 (in millions):
| For the | ||||||||||||
| Three Months Ended | ||||||||||||
| September 30, | Amount | |||||||||||
| 2010 | 2009 | Change | ||||||||||
|
Net sales
|
$ | 1,082 | $ | 1,077 | $ | 5 | ||||||
|
SOP
|
136 | 168 | (32 | ) | ||||||||
Sales volume decreased 1% for the three months ended September 30, 2010, compared with the
three months ended September 30, 2009. The decrease was the result of a decline in contract
manufacturing, which negatively impacted total volume by 4%. The decline in contract manufacturing
was partially offset by volume growth in our NCB category and increased CSD volumes. Repatriation
of brands associated with the PepsiCo transaction increased total volume by 2%.
Total CSD volume increased 2%. Volume from the repatriation of the Vernors and Squirt brands
associated with the PepsiCo transaction increased our CSD volume 2%. Volume for our Core 4 brands
increased 2%, due to a mid single-digit increase in Sunkist soda as a result of the repatriation of
brands associated with the PepsiCo transaction and a double-digit increase in Canada Dry due to
targeted marketing programs. These increases were partially offset by a mid single-digit decline in
7UP. Dr Pepper volumes declined 2%.
Total NCB volume increased 9% as a result of a 14% increase in Snapple due to the successful
restage of the brand, growth of value offerings and increased marketing. Hawaiian Punch and Mott’s
increased 14% and 3%, respectively, as a result of increased promotional activity and distribution
gains.
37
Table of Contents
Net sales increased $5 million for the three months ended September 30, 2010, compared with
the three months ended September 30, 2009. Net sales were favorably impacted by NCB and CSD volume
increases and changes in foreign currency, offset in part by the $15 million decline in contract manufacturing
and unfavorable product mix.
SOP decreased $32
million for the three months ended September 30, 2010, compared with
the three months ended September 30, 2009,
primarily due to $15 million of higher expenses associated with
labor, co-packing, unfavorable yield, and an underabsorption of
manufacturing overhead as a result of the strike at our Williamson,
New York
manufacturing facility as we continued to produce product and service
customers during this work stoppage, which ended on September 13,
2010. Other factors negatively affecting this comparison include
unfavorable product mix, increased commodity costs, higher negotiated
logistic rates, an unfavorable comparison of the actuarial
adjustments for certain insurance plans, increased marketing for the
launch of Mott’s Medleys and a $5 million unfavorable non-cash
adjustment to rent expense for certain leases. These items were
partially offset by volume growth in our NCB category, increased CSD
volumes, ongoing supply chain efficiencies and lower incentive
compensation.
Latin America Beverages
The following table details our Latin America Beverages segment’s net sales and SOP for the
three months ended September 30, 2010 and 2009 (in millions):
| For the | ||||||||||||
| Three Months Ended | ||||||||||||
| September 30, | Amount | |||||||||||
| 2010 | 2009 | Change | ||||||||||
|
Net sales
|
$ | 97 | $ | 97 | $ | — | ||||||
|
SOP
|
6 | 18 | (12 | ) | ||||||||
Sales volume increased 1% for the three months ended September 30, 2010, as compared with the
three months ended September 30, 2009. The increase in volume was driven by a 3% increase in Squirt
volume due to higher sales to third party bottlers, a 20% increase in Crush volume with the
continued growth from the introduction of new flavors in a 2.3 liter value offering, as well as
additional distribution routes added throughout 2009 and 2010. These volume increases were
partially offset by an 11% decrease in Peñafiel due to decreased sales to third party distributors
as a result of flooding in parts of southern Mexico, which restricted our ability to deliver
product during the third quarter.
Net sales remained flat for the three months ended September 30, 2010, compared with three
months ended September 30, 2009, primarily due to an unfavorable product mix which was partially
offset by the favorable impact of changes in foreign currency.
SOP decreased $12 million for the three months ended September 30, 2010, compared with the
three months ended September 30, 2009, primarily due to
increased promotional trade spending, higher marketing
investments, increased costs associated with route expansion, and IT infrastructure upgrades.
38
Table of Contents
Nine Months Ended September 30, 2010 Compared to Nine Months Ended September 30, 2009
Consolidated Operations
The following table sets forth our unaudited consolidated results of operations for the nine
months ended September 30, 2010 and 2009 (dollars in millions):
| For the Nine Months Ended September 30, | ||||||||||||||||||||
| 2010 | 2009 | Percentage | ||||||||||||||||||
| Dollars | Percent | Dollars | Percent | Change | ||||||||||||||||
|
Net sales
|
$ | 4,224 | 100.0 | % | $ | 4,175 | 100.0 | % | 1 | % | ||||||||||
|
Cost of sales
|
1,689 | 40.0 | 1,706 | 40.9 | (1 | ) | ||||||||||||||
|
|
||||||||||||||||||||
|
Gross profit
|
2,535 | 60.0 | 2,469 | 59.1 | 3 | |||||||||||||||
|
Selling, general and administrative expenses
|
1,682 | 39.8 | 1,596 | 38.2 | 5 | |||||||||||||||
|
Depreciation and amortization
|
95 | 2.3 | 84 | 2.0 | 13 | |||||||||||||||
|
Other operating expense (income), net
|
1 | — | (45 | ) | (1.1 | ) | (102 | ) | ||||||||||||
|
|
||||||||||||||||||||
|
Income from operations
|
757 | 17.9 | 834 | 20.0 | (9 | ) | ||||||||||||||
|
Interest expense
|
94 | 2.2 | 158 | 3.8 | (41 | ) | ||||||||||||||
|
Interest income
|
(2 | ) | — | (3 | ) | (0.1 | ) | 33 | ||||||||||||
|
Other income, net
|
(7 | ) | (0.2 | ) | (25 | ) | (0.6 | ) | (72 | ) | ||||||||||
|
|
||||||||||||||||||||
|
Income before provision for income taxes and equity in
earnings of unconsolidated subsidiaries
|
672 | 15.9 | 704 | 16.9 | (5 | ) | ||||||||||||||
|
Provision for income taxes
|
257 | 6.1 | 265 | 6.4 | (3 | ) | ||||||||||||||
|
|
||||||||||||||||||||
|
Income before equity in earnings of unconsolidated
subsidiaries
|
415 | 9.8 | 439 | 10.5 | (5 | ) | ||||||||||||||
|
Equity in earnings of unconsolidated subsidiaries, net
of tax
|
1 | — | 2 | 0.1 | NM | |||||||||||||||
|
|
||||||||||||||||||||
|
Net income
|
$ | 416 | 9.8 | % | $ | 441 | 10.6 | % | (6 | )% | ||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Earnings per common share:
|
||||||||||||||||||||
|
Basic
|
$ | 1.70 | NM | $ | 1.73 | NM | (2 | )% | ||||||||||||
|
Diluted
|
$ | 1.68 | NM | $ | 1.73 | NM | (3 | )% | ||||||||||||
Volume.
Volume (BCS)
Volume.
Volume (BCS) increased 3% for the nine months ended September 30, 2010, compared with the nine
months ended September 30, 2009. In the U.S. and Canada, volume increased 2% and in Mexico and
the Caribbean, volume increased 3% compared with the year ago period. CSD volume increased 2%
and NCB volume increased 4%. In CSDs, Crush increased 20% compared with the year ago period
due to expanded distribution. Dr Pepper volume increased 3% compared with the year ago period.
Our Core 4 brands were down 1% compared to the year ago period as mid single-digit declines in
Sunkist soda and 7UP were partially offset by a double-digit increase
in Canada Dry. Peñafiel
volume decreased 7% due to decreased sales to third party distributors. Squirt volume
increased 7%. In NCBs, 11% growth in Snapple was due to the successful restage of the brand,
the growth of value offerings and increased marketing. An 7% 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.
Although
volume (BCS) increased 3% for the nine months ended September 30, 2010, compared with the nine
months ended June 30, 2009, sales volume was flat 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,
which 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 increased $49 million, or approximately 1%, for the nine months ended
September 30, 2010, compared with the nine months ended September 30, 2009. The increase was
primarily attributable to volume increases in NCBs, the favorable impact of foreign currency,
concentrate price increases, and $21 million in revenue recognized under the PepsiCo license. These
increases were partially offset by a $53 million decline in contract manufacturing and an unfavorable product
mix.
Gross Profit.
Gross profit
increased $66 million for the nine months ended September 30, 2010, compared with the nine months ended September 30, 2009.
Gross margin of approximately 60% for the nine months ended September 30, 2010, was higher than the approximately 59%
gross margin for the nine months ended September 30, 2009, primarily due to the favorable product mix as a result of the
decline in contract manufacturing, lower commodity costs and ongoing
supply chain efficiencies, partially offset by $19
million of higher expenses associated with labor, co-packing,
unfavorable yield, and an underabsorption of manufacturing overhead
as a result of the strike at our Williamson, New York manufacturing
facility as we continued to produce product and service customers
during this work stoppage, which ended on September 13, 2010.
39
Table of Contents
Income from Operations.
Income from operations decreased $77 million to $757 million for the
nine months ended September 30, 2010, compared with the year ago period. The nine months ended
September 30, 2009 included one-time gains of $62 million primarily related to the termination of
certain distribution agreements. The remaining $15 million decrease in income from operations
resulted from an increase in SG&A expenses partially offset by
the factors affecting the $66 million increase in gross profit
during the nine months ended September 30, 2010. Significant
drivers of the $86 million increase in SG&A expenses include higher benefit costs, unfavorable
comparison of the changes in fair value of commodity derivatives used in the distribution process,
unfavorable impact of foreign currency, higher productivity office
investments, increased stock-based compensation costs, the one-time
transaction costs associated with the PepsiCo agreement, and the increase in marketing spend
primarily related to targeted marketing programs.
Interest Expense, Interest Income and Other Income, Net.
Interest expense decreased $64
million compared with the year ago period, reflecting the repayment of our senior unsecured Term
Loan A facility during December 2009. As a result of indemnity income associated with the Tax
Indemnity Agreement with Kraft, other income, net was $7 million for the nine months ended
September 30, 2010. Other income, net was $25 million for the nine months ended September 30, 2009,
which includes $9 million of recurring items related to indemnity income associated with the Tax
Indemnity Agreement with Kraft and an additional $16 million of one-time separation related items
resulting from an audit settlement during the third quarter of 2009.
Provision for Income Taxes.
The effective tax rates for the nine months ended September 30,
2010 and 2009 were 38.2% and 37.6%, respectively. The increase in the effective tax rate for the
nine months ended September 30, 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 1.9%, respectively. The impact of the
Canadian provincial tax rate change was partially offset by other items, including separation
related costs in the prior period that did not recur. Refer to Note 8 of the Notes to our Unaudited
Condensed Consolidated Financial Statements for further information.
Results of Operations by Segment
The following tables set forth net sales and SOP for our segments for the nine months ended
September 30, 2010 and 2009, as well as the other amounts necessary to reconcile our total segment
results to our consolidated results presented in accordance with U.S. GAAP (in millions):
| For the | ||||||||
| Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2010 | 2009 | |||||||
|
Segment Results — Net sales
|
||||||||
|
Beverage Concentrates
|
$ | 837 | $ | 784 | ||||
|
Packaged Beverages
|
3,102 | 3,126 | ||||||
|
Latin America Beverages
|
285 | 265 | ||||||
|
|
||||||||
|
Net sales
|
$ | 4,224 | $ | 4,175 | ||||
|
|
||||||||
|
|
||||||||
|
Segment Results — SOP
|
||||||||
|
Beverage Concentrates
|
$ | 535 | $ | 492 | ||||
|
Packaged Beverages
|
413 | 445 | ||||||
|
Latin America Beverages
|
31 | 41 | ||||||
|
|
||||||||
|
Total SOP
|
979 | 978 | ||||||
|
Unallocated corporate costs
|
221 | 189 | ||||||
|
Other operating expense (income), net
|
1 | (45 | ) | |||||
|
|
||||||||
|
Income from operations
|
757 | 834 | ||||||
|
Interest expense, net
|
92 | 155 | ||||||
|
Other income, net
|
(7 | ) | (25 | ) | ||||
|
|
||||||||
|
Income before provision for income taxes and
equity in earnings of unconsolidated
subsidiaries
|
$ | 672 | $ | 704 | ||||
|
|
||||||||
40
Table of Contents
Beverage Concentrates
The following table details our Beverage Concentrates segment’s net sales and SOP for the nine
months ended September 30, 2010 and 2009 (in millions):
| For the | ||||||||||||
| Nine Months Ended | ||||||||||||
| September 30, | Amount | |||||||||||
| 2010 | 2009 | Change | ||||||||||
|
Net sales
|
$ | 837 | $ | 784 | $ | 53 | ||||||
|
SOP
|
535 | 492 | 43 | |||||||||
Net sales increased $53 million, or approximately 7%, for the nine months ended September 30,
2010, compared with the nine months ended September 30, 2009. The increase was primarily due to
concentrate price increases, $21 million in revenue recognized under the PepsiCo license, and the
favorable impact of foreign currency. Concentrate price increases, which were effective in January
2010, added an incremental $30 million to net sales during the nine months ended September 30,
2010. The increase in net sales was partially offset by higher discounts.
SOP
increased $43 million, or approximately 9%, for the nine months ended September 30, 2010,
as compared with the year ago period, primarily driven by the increase in net sales and lower
compensation costs. The increase in SOP was partially offset by an increase in marketing spend
primarily related to targeted marketing programs for Dr Pepper, Canada Dry, and Sunkist soda.
Volume (BCS) increased 1% for
the nine months ended September 30, 2010, as compared
with the year ago period, primarily driven by a 3% increase Dr. Pepper, led by regular and Diet Dr Pepper. Crush increased 19%,
primarily driven by the launch of Cherry Crush in the first quarter
of 2010. These increases were partially offset by a
double-digit decline in Hawaiian Punch, Squirt, and Vernors, as well
as a 3% decrease in our Core 4 brands, primarily driven by a
double-digit decline in 7UP and a high-single digit decline in
Sunkist soda which was partially offset by a high single-digit
increase in Canada Dry. The decreases in 7UP, Sunkist soda, Hawaiian Punch, Squirt, and
Vernors were primarily driven by the repatriation of the brands to
our Packaged Beverages segment as a result of the PepsiCo licensing
agreement.
Packaged Beverages
The following table details our Packaged Beverages segment’s net sales and SOP for the nine
months ended September 30, 2010 and 2009 (in millions):
| For the | ||||||||||||
| Nine Months Ended | ||||||||||||
| September 30, | Amount | |||||||||||
| 2010 | 2009 | Change | ||||||||||
|
Net sales
|
$ | 3,102 | $ | 3,126 | $ | (24 | ) | |||||
|
SOP
|
413 | 445 | (32 | ) | ||||||||
Sales volume decreased 2% for the nine months ended September 30, 2010, compared with the nine
months ended September 30, 2009. The decrease was the result of a decline in contract
manufacturing, which negatively impacted total volume by 4%. The decline in contract manufacturing
was partially offset by volume growth in our NCB category. Repatriation of brands associated with
the PepsiCo transaction increased total volume by 1%.
Total CSD volume decreased 1%. Volume for our Core 4 brands decreased 1%, due to a mid
single-digit decline in 7UP and a low single-digit decline in Sunkist soda, partially offset by a
double-digit increase in Canada Dry due to targeted marketing programs. Dr Pepper volume decreased
2%. Volume from the repatriation of the Vernors and Squirt brands associated with the PepsiCo
transaction increased our CSD volume 1%.
Total NCB volume increased 8% as a result of a 13% increase in Snapple due to the successful
restage of the brand, growth of value offerings and increased marketing. Hawaiian Punch and Mott’s
increased 11% and 6%, respectively, as a result of increased promotional activity and distribution
gains.
Net sales decreased $24 million for the nine months ended September 30, 2010, compared with
the nine months ended September 30, 2009. The decline in contract manufacturing reduced net sales
for the nine months ended September 30, 2010, by $53 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 unfavorable product mix.
41
Table of Contents
SOP
decreased $32 million for the nine months ended September 30, 2010,
compared with the nine months ended September 30, 2009, primarily due
to unfavorable product mix and $19 million of higher expenses
associated with labor, co-packing, unfavorable yield, and an
underabsorption of manufacturing overhead as a result of the strike
at our Williamson, New York manufacturing facility as we continued to
produce product and service customers during this work stoppage,
which ended on September 13, 2010. Other factors negatively affecting
this comparison include higher benefit costs, costs and depreciation
associated with the startup of our manufacturing facility in
Victorville, California, higher inventory adjustments, a $5 million
unfavorable adjustment to rent expense for certain leases, and a
legal reserve for pending legal matters. These items were partially
offset by volume growth in our NCB category and lower costs for
packaging materials and other commodity costs.
Latin America Beverages
The following table details our Latin America Beverages segment’s net sales and SOP for the
nine months ended September 30, 2010 and 2009 (in millions):
| For the | ||||||||||||
| Nine Months Ended | ||||||||||||
| September 30, | Amount | |||||||||||
| 2010 | 2009 | Change | ||||||||||
|
Net sales
|
$ | 285 | $ | 265 | $ | 20 | ||||||
|
SOP
|
31 | 41 | (10 | ) | ||||||||
Sales volume increased 7% for the nine months ended September 30, 2010, as compared with the
nine months ended September 30, 2009. The increase in volume was driven by a 13% increase in Squirt
volume due to higher sales to third party bottlers, a 45% increase in Crush volume with the
continued growth from the introduction of new flavors in a 2.3 liter value offering, as well as
additional distribution routes added throughout 2009 and 2010. These
volume increases were
partially offset by a 7% decrease in Peñafiel due to decreased sales to third party distributors
due to increased competition and flooding in parts of southern Mexico which restricted our ability to deliver product during
the third quarter.
Net sales increased $20 million for the nine months ended September 30, 2010, compared with
the year ago period primarily due to a $17 million favorable
impact of changes in foreign currency and
an increase in sales volume, partially offset by an unfavorable impact related to product mix.
SOP decreased $10 million for the nine months ended September 30, 2010, compared with the
nine months ended September 30, 2009, as a result of route expansion costs, IT infrastructure
upgrades, and higher marketing investments, partially offset by 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.
|
42
Table of Contents
These critical accounting policies are discussed in greater detail in our Annual Report on
Form 10-K for the year ended December 31, 2009.
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
|
||
| • |
continued 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.
|
||
| • |
on October 4, 2010, the
Company received a one-time payment of $715 million for licensing
certain brands to Coke as a result of Coke’s acquisition of
CCE’s North American Bottling Business.
|
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. We issued $850 million
in 2009, as described in the section
“Senior Unsecured Notes — The 2011 and 2012 Notes”
below. As a result, $650 million
remained authorized to be issued as of September 30, 2010.
During the nine months ended September 30, 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 indentures 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 September 30, 2010 and December 31, 2009, respectively. Up to $75 million of the
Revolver is available for the issuance of letters of credit, of which $14 million and
$41 million were utilized as of September 30, 2010, and December 31, 2009, respectively.
Balances available for additional borrowings and letters of credit were $486 million and
$61 million, respectively, as of September 30, 2010.
|
Borrowings under the senior unsecured credit facility bear interest at a floating rate per
annum based upon the London Interbank Offered Rate (“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. There were no borrowings during the three months ended September 30,
2010. The average interest rate was 4.88% for the three months ended September 30, 2009. The
average interest rate was 2.25% and 4.84% for the nine months ended September 30, 2010 and 2009,
respectively. Interest expense was $2 million and $21 million for the three months ended September
30, 2010 and 2009, respectively. Interest expense was $4 million and $69 million for the nine
months ended September 30, 2010 and 2009, respectively. Amortization of deferred financing costs of
$1 million and $4 million for the three months ended September 30, 2010 and 2009, respectively, was
included in interest expense. For the nine months ended September 30, 2010 and 2009, amortization
of deferred financing costs of $2 million and $11 million was included in interest expense,
respectively.
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Table of Contents
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. There were minimal unused commitment fees for the three months ended September 30, 2010.
We incurred $1 million in unused commitment fees for the three
months ended September 30, 2009 and the nine months ended September 30, 2010 and 2009.
Principal amounts outstanding under the Revolver are due and payable in full at maturity in
2013.
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; enter into
transactions with affiliates; and enter into agreements restricting our 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 September 30, 2010 and December 31, 2009, we
were in compliance with all 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 1.70% senior notes due in
2011 (the “2011 Notes”) and 2.35% senior notes due in 2012
(the “2012 Notes”). The weighted average interest rate of
the 2011 and 2012 Notes was 2.04% for the three and nine months ended September 30, 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 $1 million for the nine months ended September 30, 2010. There was no
interest expense for the three months ended September 30, 2010. As a result of changes in fair
value prior to the termination of the economic hedge in September 2010, we recorded a
gain of $2 million and $6 million, which reduced interest expense for the three and nine months
ended September 30, 2010, respectively. Interest expense included $1 million of deferred financing
costs associated with the 2011 and 2012 Notes for the nine months ended September 30, 2010. For the
three months ended September 30, 2010, there was minimal amortization of deferred financing costs.
We utilize interest rate swaps designated as fair value and economic 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 September 30, 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 6.81% for each of the three and nine month periods ended September 30, 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 and $30 million for the
three months ended September 30, 2010 and 2009, respectively, and $88 million for the nine months
ended September 30, 2010 and 2009. Amortization of deferred financing costs of $1 million for the
nine months ended September 30, 2010 and 2009 was included in interest expense. For the three
months ended September 30, 2010 and 2009, there was minimal amortization of deferred financing
costs.
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The indenture governing the 2013, 2018, and 2038 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 September 30, 2010 and December 31, 2009, we were
in compliance with all covenant requirements.
Letter
of Credit Facility
Effective
June 2010, we entered into a Letter of Credit Facility in
addition to the portion of the Revolver reserved for issuance of
letters of credit. Under the Letter of Credit Facility, $65 million
is available for the issuance of letters of credit, of which $35
million was utilized as of September 30, 2010. Balances available for
additional letters of credit was $30 million as of September 30, 2010.
During the third quarter of 2010, our long term debt rating with Moody’s and S&P was Baa2 with
a positive outlook and BBB with a stable outlook, respectively. 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 our
anticipated obligations, stock repurchases, capital expenditures and other initiatives.
Cash Management
We fund our liquidity needs from cash flow from operations, cash on hand or amounts available
under our Revolver, if necessary.
Capital Expenditures
Cash paid for capital expenditures was $170 million for the nine months ended September 30,
2010. Additions primarily related to expansion and replacement of existing cold drink equipment,
the final development of our new manufacturing and distribution center in Victorville, California, IT
investments for system upgrades, and expansion of our distribution fleet. We expect to
incur discretionary capital expenditures in an amount equal to approximately $120 million for the
remainder of the year, 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 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 September 30, 2010
and 2009 (in millions):
| For the | ||||||||
| Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2010 | 2009 | |||||||
|
Net cash provided by operating activities
|
$ | 1,539 | $ | 701 | ||||
|
Net cash used in investing activities
|
(151 | ) | (157 | ) | ||||
|
Net cash used in financing activities
|
(1,447 | ) | (483 | ) | ||||
Net Cash Provided by Operating Activities
Net cash provided by operating activities increased $838 million for the nine months
ended September 30, 2010, compared with the year ago period,
primarily due to the receipt of a one-time nonrefundable cash payment of $900
million from PepsiCo recorded as deferred revenue.
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Table of Contents
Net Cash Used in Investing Activities
The decrease of $6 million in cash used in investing activities for the nine months ended
September 30, 2010, compared with the year ago period, was primarily attributable to lower capital
expenditures of $53 million and higher proceeds of $11 million from disposal of property, plant and equipment in 2010, partially
offset by the absence of the one-time cash receipts in 2009 of $68 million primarily from the
termination of certain distribution agreements.
Net Cash Used in Financing Activities
The increase of $964 million in cash used in financing activities for the nine months
ended September 30, 2010, compared with the year ago period, was
driven by stock repurchases of $910 million, the
$405 million repayment of our senior unsecured credit facility, and
dividend payments of $136 million.
Cash and Cash Equivalents
As a result of the above items, cash and cash equivalents decreased $56 million since
December 31, 2009 to $224 million as of September 30, 2010.
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 26% of our total cash position as of
September 30, 2010.
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 stockholders of record at the close of business on
March 22, 2010.
On May 19, 2010, our Board declared a dividend of $0.25 per share on outstanding common stock,
which was paid on July 9, 2010 to stockholders of record at the close of business on June 21, 2010.
On August 11, 2010, our Board declared a dividend of $0.25 per share on outstanding common
stock, which was paid on October 8, 2010, to shareholders of record on September 20, 2010.
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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 25.2
million shares of our common stock valued at approximately $910 million in the nine months ended
September 30, 2010. Refer to Part II, Item 2 of this Quarterly Report on Form 10-Q for additional
information regarding these repurchases.
On July 12, 2010, the Board authorized the repurchase of an additional $1 billion of our
outstanding common stock over the next three years, which additional
authorization may be used to repurchase shares of our common stock
after the funds authorized on February 24, 2010 have been utilized.
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
September 30, 2010. 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 | ||||||||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||||
| Total | 2010 | 2011 | 2012 | 2013 | 2014 | After 2014 | ||||||||||||||||||||||
|
Revolver
|
$ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||
|
Interest payments
(1)
|
1,256 | 65 | 130 | 127 | 109 | 101 | 724 | |||||||||||||||||||||
|
Operating leases
|
382 | 19 | 69 | 59 | 52 | 43 | 140 | |||||||||||||||||||||
|
Purchase obligations
(2)
|
628 | 193 | 184 | 113 | 88 | 25 | 25 | |||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Total
|
$ | 2,266 | $ | 277 | $ | 383 | $ | 299 | $ | 249 | $ | 169 | $ | 889 | ||||||||||||||
|
|
||||||||||||||||||||||||||||
| (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 September 30, 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 other than letters of credit outstanding.
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 September 30, 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 September 30, 2010, we had
contracts outstanding with a notional value of $107 million maturing at various dates through
December 17, 2012.
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 September 30, 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. Effective September 21, 2010, this financial
instrument was terminated.
As
a result of the remaining interest rate swap, we pay an average floating rate, which fluctuates
semi-annually, based on LIBOR. The average floating rate to be paid by us as of September 30, 2010
was less than 1%. The average fixed rate to be received by us as of
September 30, 2010 was 1.70%
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 September 30, 2010, was a
net asset of $8 million.
As of September 30, 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 $3 million
on an annual basis.
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Table of Contents
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 September 30, 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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Table of Contents
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 approximately 9.6 million shares of our common stock valued at approximately
$353 million in the third quarter of 2010. Our share repurchase activity for each of the three
months and the quarter ended September 30, 2010 was as follows (in thousands, except per share
data):
| Maximum Dollar | ||||||||||||||||
| Value of Shares | ||||||||||||||||
| Total Number of | that May Yet be | |||||||||||||||
| Shares Purchased as | Purchased Under | |||||||||||||||
| Part of Publicly | Publicly | |||||||||||||||
| Number of Shares | Average Price Paid | Announced Plans or | Announced Plans | |||||||||||||
| Period | Purchased (1) | per Share | Programs (2) | or Programs | ||||||||||||
|
July 1, 2010 – July 31, 2010
|
— | $ | — | — | $ | 1,447,741 | ||||||||||
|
August 1, 2010 – August 31, 2010
|
62 | 38.51 | — | 1,447,741 | ||||||||||||
|
September 1 2010 – September 30, 2010
|
9,500 | 36.84 | 9,500 | 1,097,741 | ||||||||||||
|
|
||||||||||||||||
|
For the quarter ended September
30, 2010
|
9,562 | 36.85 | 9,500 | |||||||||||||
|
|
||||||||||||||||
| (1) |
The total number of shares purchased includes: (i) shares purchased in open-market transactions pursuant to our publicly announced repurchase program described in
footnote 2 below totaling 9,500 thousand shares for the month of September and (ii) shares that were repurchased pursuant to a previously unannounced odd-lot repurchase
program totaling 62 thousand shares for the month of August.
|
|
| (2) |
As previously announced, on
November 20, 2009, our Board of Directors (“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. On July 12, 2010, the Board authorized the repurchase of an additional $1
billion of the Company’s outstanding common stock over the next three years, for a total of $2 billion authorized. This column discloses the number of shares purchased
pursuant to these programs during the indicated time periods.
|
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Table of Contents
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
| 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 September 30, 2010, formatted in
XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Statements of
Operations for the three and nine months ended September 30, 2010 and 2009,
(ii) Condensed Consolidated Balance Sheets as of September 30, 2010 and December 31, 2009,
(iii) Condensed Consolidated Statements of Cash Flows for the nine months ended
September 30, 2010 and 2009, and (iv) the Notes to Condensed Consolidated Financial Statements.
|
* 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. | ||||||
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By: | /s/ Martin M. Ellen | ||||
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Name: | Martin M. Ellen | ||||
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Title: | Executive Vice President and Chief Financial | ||||
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Officer of Dr Pepper Snapple Group, Inc. | |||||
Date: October 27, 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