KEURIG DR PEPPER INC.
10-Ks and 10-Qs
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
R
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED
SEPTEMBER 30, 2012
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
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Delaware
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98-0517725
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(State or other jurisdiction of
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(I.R.S. employer
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incorporation or organization)
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identification number)
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5301 Legacy Drive, Plano, Texas
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75024
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(Address of principal executive offices)
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(Zip code)
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(972) 673-7000
(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
R
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
R
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.
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Large Accelerated Filer
R
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Accelerated Filer
o
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Non-Accelerated Filer
o
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Smaller Reporting Company
o
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(Do not check if a smaller reporting company)
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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
R
As of
October 22, 2012
, there were
208,111,994
shares of the registrant’s common stock, par value $0.01 per share, outstanding.
DR PEPPER SNAPPLE GROUP, INC.
FORM 10-Q
INDEX
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Page
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ii
DR PEPPER SNAPPLE GROUP, INC.
CONDENSED CONSOLIDATED
STATEMENTS OF INCOME
For the
Three and Nine Months Ended September 30, 2012 and 2011
(
Unaudited, in
millions except per share data)
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Item 1.
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Financial Statements (Unaudited).
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For the
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For the
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|||||||||||||
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Three Months Ended
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Nine Months Ended
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September 30,
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September 30,
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2012
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2011
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2012
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2011
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Net sales
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$
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1,528
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$
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1,529
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$
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4,511
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$
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4,442
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Cost of sales
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626
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672
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1,895
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1,881
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Gross profit
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902
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857
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2,616
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2,561
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Selling, general and administrative expenses
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561
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559
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1,713
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1,704
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Depreciation and amortization
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29
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31
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95
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95
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Other operating expense (income), net
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4
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6
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8
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9
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Income from operations
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308
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261
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800
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753
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Interest expense
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31
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30
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94
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85
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Interest income
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—
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(1
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)
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(1
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(2
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)
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Other income, net
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(4
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(4
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)
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(8
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(9
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Income before provision for income taxes and equity in earnings of unconsolidated subsidiaries
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281
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236
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715
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679
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Provision for income taxes
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102
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82
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256
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240
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Income before equity in earnings of unconsolidated subsidiaries
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179
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154
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459
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439
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Equity in earnings of unconsolidated subsidiaries, net of tax
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—
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—
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—
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1
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Net income
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$
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179
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$
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154
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$
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459
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$
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440
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Earnings per common share:
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Basic
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$
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0.85
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$
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0.71
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$
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2.17
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$
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2.00
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Diluted
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0.84
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0.71
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2.15
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1.97
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Weighted average common shares outstanding:
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Basic
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210.4
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216.0
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211.6
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220.5
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Diluted
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212.0
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218.2
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213.3
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222.9
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Cash dividends declared per common share
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$
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0.34
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$
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0.32
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$
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1.02
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$
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0.89
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The accompanying notes are an integral part of these
unaudited condensed consolidated
financial statements.
1
DR PEPPER SNAPPLE GROUP, INC.
CONDENSED CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME
For the
Three and Nine Months Ended September 30, 2012 and 2011
(
Unaudited, in
millions)
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For the
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For the
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Three Months Ended
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Nine Months Ended
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September 30,
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September 30,
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2012
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2011
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2012
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2011
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Comprehensive income
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$
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186
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$
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79
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$
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471
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$
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371
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The accompanying notes are an integral part of these
unaudited condensed consolidated
financial statements.
2
DR PEPPER SNAPPLE GROUP, INC.
CONDENSED CONSOLIDATED
BALANCE SHEETS
As of
September 30, 2012 and December 31, 2011
(
Unaudited, in
millions except share and per share data)
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September 30,
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December 31,
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2012
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2011
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Assets
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Current assets:
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Cash and cash equivalents
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$
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383
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$
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701
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Accounts receivable:
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Trade, net
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546
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585
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Other
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52
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50
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Inventories
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207
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212
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Deferred tax assets
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94
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96
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Prepaid expenses and other current assets
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114
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113
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Total current assets
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1,396
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1,757
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Property, plant and equipment, net
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1,194
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1,152
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Investments in unconsolidated subsidiaries
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14
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13
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Goodwill
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2,983
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2,980
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Other intangible assets, net
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2,685
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2,677
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Other non-current assets
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583
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573
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Non-current deferred tax assets
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134
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131
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Total assets
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$
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8,989
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$
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9,283
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Liabilities and Stockholders' Equity
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Current liabilities:
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Accounts payable
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$
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297
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$
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265
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Deferred revenue
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65
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65
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Current portion of long-term obligations
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701
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452
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Income taxes payable
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48
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530
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Other current liabilities
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625
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603
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Total current liabilities
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1,736
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1,915
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Long-term obligations
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2,065
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2,256
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Non-current deferred tax liabilities
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635
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586
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Non-current deferred revenue
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1,402
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1,449
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Other non-current liabilities
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833
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814
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Total liabilities
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6,671
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7,020
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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
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—
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—
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Common stock, $.01 par value, 800,000,000 shares authorized, 208,393,617 and 212,130,239 shares issued and outstanding for 2012 and 2011, respectively
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2
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2
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Additional paid-in capital
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1,433
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1,631
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Retained earnings
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981
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740
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Accumulated other comprehensive loss
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(98
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(110
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)
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Total stockholders' equity
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2,318
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2,263
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Total liabilities and stockholders' equity
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$
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8,989
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$
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9,283
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The accompanying notes are an integral part of these
unaudited condensed consolidated
financial statements.
3
DR PEPPER SNAPPLE GROUP, INC
.
CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS
For the
Nine Months Ended September 30, 2012 and 2011
(
Unaudited, in
millions)
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For the
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Nine Months Ended
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||||||
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September 30,
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2012
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2011
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Operating activities:
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Net income
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$
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459
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$
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440
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Adjustments to reconcile net income to net cash provided by operating activities:
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Depreciation expense
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154
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148
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Amortization expense
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28
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23
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Amortization of deferred revenue
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(49
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)
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(49
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)
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Employee stock-based compensation expense
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26
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24
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Deferred income taxes
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58
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(361
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)
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Other, net
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(21
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)
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12
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Changes in assets and liabilities:
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Trade accounts receivable
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42
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(12
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)
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Other accounts receivable
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(1
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)
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(15
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)
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Inventories
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7
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(19
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)
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Other current and non-current assets
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(20
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)
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(21
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Other current and non-current liabilities
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23
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35
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Trade accounts payable
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24
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(7
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)
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Income taxes payable
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(466
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)
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382
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Net cash provided by operating activities
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264
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580
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Investing activities:
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Purchase of property, plant and equipment
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(143
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)
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(148
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)
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Purchase of intangible assets
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(7
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)
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—
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Proceeds from disposals of property, plant and equipment
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6
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2
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Net cash used in investing activities
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(144
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)
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(146
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)
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Financing activities:
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Proceeds from senior unsecured notes
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—
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500
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Repurchase of shares of common stock
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(262
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)
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(425
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)
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Dividends paid
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(213
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)
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(183
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)
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Proceeds from stock options exercised
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21
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12
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Excess tax benefit on stock-based compensation
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16
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9
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Deferred financing charges paid
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(1
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)
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(3
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)
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Other, net
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(3
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)
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(2
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)
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Net cash used in financing activities
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(442
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)
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(92
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)
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Cash and cash equivalents — net change from:
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Operating, investing and financing activities
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(322
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)
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342
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Effect of exchange rate changes on cash and cash equivalents
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4
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(6
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)
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Cash and cash equivalents at beginning of period
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701
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315
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Cash and cash equivalents at end of period
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$
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383
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$
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651
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Supplemental cash flow disclosures of non-cash investing and financing activities:
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Capital expenditures included in other current liabilities
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$
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60
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$
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32
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Dividends declared but not yet paid
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72
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69
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Capital lease additions
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49
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—
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Supplemental cash flow disclosures:
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Interest paid
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$
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68
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$
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42
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Income taxes paid
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650
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198
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The accompanying notes are an integral part of these
unaudited condensed consolidated
financial statements.
4
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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1.
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General
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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.
On October 1, 2012, Kraft Foods Inc. spun-off its North American grocery business to its shareholders and changed its name to Mondelēz International, Inc. ("Mondelēz").
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, 2011
.
Reclassifications
Changes have been made to the Condensed Consolidated Statement of Cash Flows for the third quarter of 2011 to reflect changes in presentation made in the fourth quarter of 2011 with no impact to the total cash (used in) provided by operating, investing or financing activities.
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 estimates:
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revenue recognition;
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•
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customer marketing programs and incentives;
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•
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goodwill and other indefinite-lived intangible assets;
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•
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pension and post-retirement benefits;
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•
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risk management programs; and
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•
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income taxes.
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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, 2011
.
5
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Recently Issued Accounting Standards
In July 2012, the FASB issued Accounting Standard Update 2012-02,
Intangibles—Goodwill and Other: Testing Indefinite-Lived Intangible Assets for Impairment
("ASU 2012-02"). The intent of ASU 2012-02 is to simplify how registrants test indefinite-lived intangible asset for impairment and to improve consistency in impairment testing guidance among long-lived asset categories. ASU 2012-02 permits registrants to first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test in accordance with U.S. GAAP. An entity will have an option not to calculate annually the fair value of an indefinite-lived intangible asset if the entity determines that it is not more likely than not that the asset is impaired. ASU 2012-02 is effective for annual and interim goodwill impairment tests performed for years beginning after September 15, 2012. Early adoption is permitted. Management will adopt this guidance for its annual and interim indefinite-lived intangible assets impairment testing during 2012. The adoption of ASU 2012-02 will not have a material impact on the Company's financial position, results of operations or cash flows.
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, 2012.
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•
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Amendments to certain fair value measurement requirements reflected changes in wording used to describe and clarify the FASB's intent with respect to many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements.
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•
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The requirement to present the total of comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The Company presented the comprehensive income in two separate but consecutive statements within the Condensed Consolidated Financial Statements.
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•
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The qualitative option meant to simplify how registrants test goodwill for impairment by assessing certain factors to determine whether it is necessary to perform the two-step goodwill impairment test included in U.S. GAAP.
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2.
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Inventories
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Inventories as of
September 30, 2012, and December 31, 2011
consisted of the following (in millions):
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September 30,
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December 31,
|
|||||
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2012
|
2011
|
||||||
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Raw materials
|
$
|
88
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|
$
|
91
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|
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Work in process
|
6
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|
4
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|
|||
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Finished goods
|
175
|
|
171
|
|
|||
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Inventories at FIFO cost
|
269
|
|
266
|
|
|||
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Reduction to LIFO cost
|
(62
|
)
|
(54
|
)
|
|||
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Inventories
|
$
|
207
|
|
$
|
212
|
|
|
6
DR PEPPER SNAPPLE GROUP, INC.
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, 2012, and the year ended December 31, 2011
, by reporting unit, are as follows (in millions):
|
|
Beverage Concentrates
|
WD Reporting Unit
(1)
|
DSD Reporting Unit
(1)
|
Latin America Beverages
|
Total
|
||||||||||||||
|
Balance as of December 31, 2010
|
|
|
|
|
|
||||||||||||||
|
Goodwill
|
$
|
1,732
|
|
$
|
1,220
|
|
$
|
180
|
|
$
|
32
|
|
$
|
3,164
|
|
||||
|
Accumulated impairment losses
|
—
|
|
—
|
|
(180
|
)
|
—
|
|
(180
|
)
|
|||||||||
|
|
1,732
|
|
1,220
|
|
—
|
|
32
|
|
2,984
|
|
|||||||||
|
Foreign currency impact
|
—
|
|
—
|
|
—
|
|
(4
|
)
|
(4
|
)
|
|||||||||
|
Balance as of December 31, 2011
|
|
|
|
|
|
||||||||||||||
|
Goodwill
|
1,732
|
|
1,220
|
|
180
|
|
28
|
|
3,160
|
|
|||||||||
|
Accumulated impairment losses
|
—
|
|
—
|
|
(180
|
)
|
—
|
|
(180
|
)
|
|||||||||
|
|
1,732
|
|
1,220
|
|
—
|
|
28
|
|
2,980
|
|
|||||||||
|
Foreign currency impact
|
—
|
|
—
|
|
—
|
|
3
|
|
3
|
|
|||||||||
|
Balance as of September 30, 2012
|
|
|
|
|
|
||||||||||||||
|
Goodwill
|
1,732
|
|
1,220
|
|
180
|
|
31
|
|
3,163
|
|
|||||||||
|
Accumulated impairment losses
|
—
|
|
—
|
|
(180
|
)
|
—
|
|
(180
|
)
|
|||||||||
|
|
$
|
1,732
|
|
$
|
1,220
|
|
$
|
—
|
|
$
|
31
|
|
$
|
2,983
|
|
||||
____________________________
|
(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, 2012, and December 31, 2011
, are as follows (in millions):
|
|
September 30, 2012
|
December 31, 2011
|
|||||||||||||||||||||
|
|
Gross
|
Accumulated
|
Net
|
Gross
|
Accumulated
|
Net
|
|||||||||||||||||
|
|
Amount
|
Amortization
|
Amount
|
Amount
|
Amortization
|
Amount
|
|||||||||||||||||
|
Intangible assets with indefinite lives:
|
|
|
|
|
|
|
|||||||||||||||||
|
Brands
(1)
|
$
|
2,653
|
|
$
|
—
|
|
$
|
2,653
|
|
$
|
2,648
|
|
$
|
—
|
|
$
|
2,648
|
|
|||||
|
Distribution rights
|
12
|
|
—
|
|
12
|
|
8
|
|
—
|
|
8
|
|
|||||||||||
|
Intangible assets with finite lives:
|
|
|
|
|
|
|
|||||||||||||||||
|
Brands
|
29
|
|
(25
|
)
|
4
|
|
29
|
|
(24
|
)
|
5
|
|
|||||||||||
|
Distribution rights
|
6
|
|
(1
|
)
|
5
|
|
3
|
|
—
|
|
3
|
|
|||||||||||
|
Customer relationships
|
76
|
|
(66
|
)
|
10
|
|
76
|
|
(64
|
)
|
12
|
|
|||||||||||
|
Bottler agreements
|
19
|
|
(18
|
)
|
1
|
|
19
|
|
(18
|
)
|
1
|
|
|||||||||||
|
Total
|
$
|
2,795
|
|
$
|
(110
|
)
|
$
|
2,685
|
|
$
|
2,783
|
|
$
|
(106
|
)
|
$
|
2,677
|
|
|||||
____________________________
|
(1)
|
In
2012
, brands with indefinite lives increased due to a
$5 million
change in foreign currency translation rates.
|
7
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
As of
September 30, 2012
, the weighted average useful life of intangible assets with finite lives was
nine years
in total, consisting of
five years
for distribution rights,
10 years
for both brands and customer relationships and
15 years
for bottler agreements. Amortization expense for intangible assets was
$1 million
and
$4 million
for the
three and nine months ended September 30, 2012
, respectively, and
$1 million
and
$7 million
for the
three and nine months ended September 30, 2011
, respectively.
Amortization expense of these intangible assets over the remainder of
2012
and the next four years is expected to be the following (in millions):
|
Year
|
Aggregate Amortization Expense
|
||
|
October 1, 2012 through December 31, 2012
|
$
|
1
|
|
|
2013
|
5
|
|
|
|
2014
|
5
|
|
|
|
2015
|
5
|
|
|
|
2016
|
2
|
|
|
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. 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, 2012
.
4. Other Current Liabilities
Other current liabilities consisted of the following as of
September 30, 2012, and December 31, 2011
(in millions):
|
|
September 30,
|
December 31,
|
|||||
|
2012
|
2011
|
||||||
|
Customer rebates and incentives
|
$
|
218
|
|
$
|
225
|
|
|
|
Accrued compensation
|
89
|
|
98
|
|
|||
|
Insurance reserves
|
43
|
|
35
|
|
|||
|
Interest accrual and interest rate swap liability
|
91
|
|
52
|
|
|||
|
Dividends payable
|
72
|
|
68
|
|
|||
|
Other
|
112
|
|
125
|
|
|||
|
Total other current liabilities
|
$
|
625
|
|
$
|
603
|
|
|
8
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. Long-term Obligations
The following table summarizes the Company's long-term debt obligations as of
September 30, 2012, and December 31, 2011
(in millions):
|
|
September 30,
|
December 31,
|
|||||
|
2012
|
2011
|
||||||
|
Senior unsecured notes
(1)
|
$
|
2,710
|
|
$
|
2,701
|
|
|
|
Revolving credit facility
|
—
|
|
—
|
|
|||
|
Less — current portion
(2)
|
(701
|
)
|
(452
|
)
|
|||
|
Subtotal
|
2,009
|
|
2,249
|
|
|||
|
Long-term capital lease obligations
|
56
|
|
7
|
|
|||
|
Long-term obligations
|
$
|
2,065
|
|
$
|
2,256
|
|
|
____________________________
|
(1)
|
The carrying amount includes the unamortized net discount on debt issuances and an adjustment of
$37 million
and
$29 million
as of
September 30, 2012, and December 31, 2011
, respectively,
related to the change in the fair value of interest rate swaps designated as fair value hedges or the unamortized value of de-designated fair value hedges.
See Note 6 for further information regarding derivatives.
|
|
(2)
|
The carrying amount includes an adjustment of
$1 million
and
$2 million
as of
September 30, 2012, and December 31, 2011
, respectively, related to the unamortized value of de-designated fair value hedges on the Company's senior unsecured notes due December 21, 2012.
See Note 6 for further information regarding derivatives.
|
As of
September 30, 2012
, the Company was in compliance with all financial covenant requirements relating to its senior unsecured notes and under its unsecured credit agreement.
Senior Unsecured Notes
Senior unsecured notes consisted of the following (in millions):
|
Carrying Amount
|
||||||||||||||||
|
September 30,
|
December 31,
|
|||||||||||||||
|
Issuance
|
Maturity Date
|
Rate
|
Principal Amount
|
2012
|
2011
|
|||||||||||
|
2012 Notes
|
December 21, 2012
|
2.35%
|
$
|
450
|
|
$
|
451
|
|
$
|
452
|
|
|||||
|
2013 Notes
|
May 1, 2013
|
6.12%
|
250
|
|
250
|
|
250
|
|
||||||||
|
2016 Notes
|
January 15, 2016
|
2.90%
|
500
|
|
500
|
|
500
|
|
||||||||
|
2018 Notes
|
May 1, 2018
|
6.82%
|
724
|
|
724
|
|
724
|
|
||||||||
|
2019 Notes
|
January 15, 2019
|
2.60%
|
250
|
|
254
|
|
250
|
|
||||||||
|
2021 Notes
|
November 15, 2021
|
3.20%
|
250
|
|
255
|
|
249
|
|
||||||||
|
2038 Notes
|
May 1, 2038
|
7.45%
|
250
|
|
276
|
|
276
|
|
||||||||
|
$
|
2,674
|
|
$
|
2,710
|
|
$
|
2,701
|
|
||||||||
Termination of the Prior Senior Unsecured Credit Facility
-
The Company's senior unsecured credit agreement, which was amended and restated on April 11, 2008, was terminated on September 25, 2012.
There were no principal borrowings outstanding under this facility as of
December 31, 2011
.
9
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Execution of the New Unsecured Credit Agreement
On September 25, 2012, the Company entered into a new five-year unsecured credit agreement (the "Credit Agreement"), which provides for a
$500 million
revolving line of credit (the "Revolver"). Borrowings under the Revolver bear interest at a floating rate per annum based upon the alternate base rate ("ABR") or the Eurodollar rate, in each case plus an applicable margin which varies based upon the Company's debt ratings. Rates range from
0.000%
to
0.300%
for ABR loans and from
0.795%
to
1.300%
for Eurodollar loans. The ABR is defined as the greater of (a) JPMorgan Chase Bank's prime rate, (b) the federal funds effective rate plus
0.500%
and (c) the adjusted LIBOR for a one month interest period. The adjusted LIBOR is the London interbank offered rate for dollars adjusted for a statutory reserve rate set by the Board of Governors of the Federal Reserve System of the United States of America.
Additionally, the Revolver is available for the issuance of letters of credit and swingline advances not to exceed
$75 million
and
$50 million
, respectively. Swingline advances will accrue interest at a rate equal to the ABR plus the applicable margin.
The following table provides amounts utilized and available for the Revolver and each sublimit arrangement type as of
September 30, 2012
(in millions):
|
Amount Utilized
|
Balances Available
|
||||||
|
Revolver
|
$
|
—
|
|
$
|
493
|
|
|
|
Letters of credit
|
7
|
|
68
|
|
|||
|
Swingline advances
|
—
|
|
50
|
|
|||
The Credit Agreement further provides that the Company may request at any time, subject to the satisfaction of certain conditions, that the aggregate commitments under the facility be increased by a total amount not to exceed
$250 million
.
The Credit Agreement's representations, warranties, covenants and events of default are generally customary for investment grade credit and includes a covenant that requires the Company to maintain a ratio of consolidated total debt (as defined in the Credit Agreement) to annualized consolidated EBITDA (as defined in the Credit Agreement) of no more than
3.00
to
1.00
, tested quarterly. Upon the occurrence of an event of default, among other things, amounts outstanding under the Credit Agreement may be accelerated and the commitments may be terminated. The Company's obligations under the Credit Agreement are guaranteed by certain of the Company's direct and indirect domestic subsidiaries on the terms set forth in the Credit Agreement. The Credit Agreement has a maturity date of September 25, 2017; however, the Company, with the consent of lenders holding more than
50%
of the total commitments under the Credit Agreement and subject to the satisfaction of certain conditions, may extend the maturity date for up to
two
additional one-year terms.
An unused commitment fee is payable quarterly to the lenders on the unused portion of the commitments of the Revolver equal to
0.08%
to
0.20%
per annum, depending upon the Company's debt ratings.
There were no significant unused commitment fees incurred during the three and nine months ended September 30, 2012.
Commercial Paper Program
On December 10, 2010, the Company entered into a commercial paper program under which the Company may issue unsecured commercial paper notes (the "Commercial Paper") on a private placement basis up to a maximum aggregate amount outstanding at any time of
$500 million
. As of
September 30, 2012, and December 31, 2011
, the Company had no outstanding Commercial Paper.
Capital Lease Obligations
Long-term capital lease obligations totaled
$56 million
and
$7 million
as of
September 30, 2012, and December 31, 2011
, respectively. Current obligations related to the Company's capital leases were
$1 million
and
$4 million
as of
September 30, 2012, and December 31, 2011
, respectively, and were included as a component of other current liabilities.
10
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Shelf Registration Statement
On November 20, 2009, the Company's Board of Directors (the "Board") authorized the Company to issue up to
$1,500 million
of securities. Subsequently, the Company filed a "well-known seasoned issuer" shelf registration statement with the Securities and Exchange Commission, effective December 14, 2009, which registers an indeterminable amount of debt securities for future sales.
The Company issued senior unsecured notes of
$850 million
on December 21, 2009 and
$500 million
on January 11, 2011.
On May 18, 2011, the Board authorized the issuance of up to an additional
$1,350 million
of debt securities. On November 15, 2011, the Company issued senior unsecured notes of
$500 million
.
As a result,
$1,000 million
remains available for future issuance. The shelf registration statement expires December 14, 2012.
Letters of Credit Facilities
The Company currently has letter of credit facilities available in addition to the portion of the Revolver reserved for issuance of letters of credit. Under these letter of credit facilities,
$130 million
is available for the issuance of letters of credit,
$55 million
of which was utilized as of
September 30, 2012
. The balance available for additional letters of credit was
$75 million
as of
September 30, 2012
.
|
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 contracts, foreign exchange forward contracts, commodity forward 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 contracts 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 instrument deferred in AOCL is reclassified to net income and is reported as a component of the
unaudited Condensed Consolidated
Statements of Income. For derivative instruments that are designated and qualify as fair value hedges, the effective change in the fair value of the instrument, 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 a hedging instrument, the gain or loss on the instrument is recognized in earnings in the period of change.
11
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Certain interest rate contracts 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, t
he Company assesses whether the derivative instrument is effective in offsetting the changes in fair value or variability of cash flows at the inception of the derivative contract. DPS measures hedge ineffectiveness on a quarterly basis throughout the designated period.
Changes in the fair value of the derivative instrument that do not effectively offset changes in the fair value of the underlying hedged item throughout the designated hedge period are recorded in earnings each period.
If a fair value or cash flow hedge were to cease to qualify for hedge accounting, or were terminated, the derivatives would continue to be carried on the balance sheet at fair value until settled and hedge accounting would be discontinued prospectively. If the underlying hedged transaction ceases to exist, any associated amounts reported in AOCL would be reclassified to earnings at that time.
Interest Rates
Cash Flow Hedges
During the second quarter of 2011, in order to hedge the variability in cash flows from interest rate changes associated with the Company's planned issuances of long-term debt, the Company entered into two forward starting swap agreements with an aggregate notional value of
$150 million
and one forward starting swap agreement with a notional value of
$100 million
in order to fix the rate for a portion of a future seven and ten year unsecured debt issuance in 2011, respectively. These forward starting swaps were unwound during the fourth quarter of 2011 in connection with the Company's issuance of the 2019 and 2021 Notes. Upon termination, the Company paid
$25 million
to the counterparties, which will be amortized to interest expense over the term of the issued debt.
During the second and third quarter of 2011, the Company also entered into forward starting swap agreements with an aggregate notional value of
$300 million
in order to fix the rate for a portion of a future seven and ten year unsecured debt issuance in 2012. These forward starting swaps are expected to be unwound during the fourth quarter of 2012.
The effective portion of changes in the fair value of the derivative that is designated as a cash flow hedge is being recorded in AOCL and will be subsequently reclassified into earnings during the period in which the hedged forecasted transaction affects earnings. Ineffectiveness, if any, related to the Company's changes in estimates about the debt issuance related to the forward starting swap would be recognized directly in earnings as a component of interest expense during the period incurred.
Fair Value Hedges
The Company is 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.
In December 2009, the Company entered into two 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 and qualified for the shortcut method of accounting under U.S. GAAP.
During 2010, the Company terminated and settled the
$450 million
notional interest rate swap linked to the 2012 Notes. With the fair value hedge discontinued, the Company ceased adjusting the carrying value of the 2012 Notes corresponding to the notional amounts. The previous adjustments of the carrying value of the 2012 Notes will continue to be carried on the balance sheet and will be amortized over the remaining term of the 2012 Notes. As of
September 30, 2012, and December 31, 2011
, the unamortized portion was
$1 million
and
$2 million
, respectively, and was included in the current portion of long-term obligations. Refer to Note 5 for further information.
In December 2010, the Company entered into an interest rate swap having a notional amount of
$100 million
and maturing in May 2038 in order to effectively convert a portion of the 2038 Notes from fixed-rate debt to floating-rate debt and designated it as a fair value hedge. The assessment of hedge effectiveness is made by comparing the cumulative change in the fair value of the hedged item attributable to changes in the benchmark interest rate with the cumulative changes in the fair value of the interest rate swap, with any ineffectiveness recorded in earnings as interest expense during the period incurred. As of
September 30, 2012, and December 31, 2011
, the impact of the fair value hedge on the 2038 Notes increased the carrying value by
$26 million
and
$27 million
, respectively.
12
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In November 2011, the Company entered into four interest rate swaps having an aggregate notional amount of
$250 million
and durations ranging from seven to ten years in order to convert fixed-rate, long-term debt to floating rate debt. These swaps were entered into upon the issuance of the 2019 and 2021 Notes, and were accounted for as fair value hedges and qualified for the shortcut method of accounting under U.S. GAAP. As of
September 30, 2012
, the impact of the fair value hedge on the 2019 and 2021 Notes increased the carrying value by
$10 million
. As of
December 31, 2011
, there was no change in the carrying value of the 2019 and 2021 Notes as a result of the impact of the fair value hedge.
Economic Hedges
In addition to derivative instruments that qualify for and are designated as hedging instruments under U.S. GAAP, the Company utilized various interest rate derivative contracts that were not designated as cash flow or fair value hedges to manage interest rate risk. Gains or losses on these derivative instruments were recognized in earnings during the period the instruments were outstanding.
In December 2010, with the expected issuance of long-term fixed rate debt, the Company entered into a treasury lock agreement with a notional value of
$200 million
and a maturity date of January 2011 to economically hedge the exposure to the possible rise in the benchmark interest rate prior to a future issuance of senior unsecured notes. This treasury lock was settled in cash for approximately
$1 million
coincident with the issuance of the 2016 Notes in January 2011.
Foreign Exchange
Cash Flow Hedges
The Company's Canadian business purchases its inventory through transactions denominated and settled in United States ("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, 2012, and 2011
, 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, 2012
. The Company had outstanding foreign exchange forward contracts with notional amounts of
$101 million
and
$146 million
as of
September 30, 2012
, and
2011
, respectively.
Economic Hedges
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. DPS did not have any of these contracts outstanding as of
September 30, 2012
. The Company had outstanding foreign exchange forward contracts with a notional amount of
$3 million
as of
September 30, 2011
.
Commodities
DPS centrally manages the exposure to volatility in the prices of certain commodities used in its production process through forward contracts. The intent of these contracts is to provide a certain level of predictability in the Company's overall cost structure. During the
nine months ended September 30, 2012, and 2011
, the Company held forward contracts that economically hedged certain of its risks. In these cases, a natural hedging relationship exists in which 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 Income 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 completion of the underlying transaction, at which time the gain or loss is reflected as a component of the respective segment's operating profit ("SOP").
13
DR PEPPER SNAPPLE GROUP, INC.
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, 2012, and December 31, 2011
(in millions):
|
|
Balance Sheet Location
|
September 30,
2012 |
December 31,
2011 |
||||||
|
Assets:
|
|
|
|
||||||
|
Derivative instruments designated as hedging instruments under U.S. GAAP:
|
|
|
|
||||||
|
Interest rate contracts
|
Prepaid expenses and other current assets
|
$
|
12
|
|
$
|
8
|
|
||
|
Interest rate contracts
|
Other non-current assets
|
28
|
|
22
|
|
||||
|
Foreign exchange forward contracts
|
Other non-current assets
|
—
|
|
1
|
|
||||
|
Derivative instruments not designated as hedging instruments under U.S. GAAP:
|
|
|
|
||||||
|
Commodity contracts
|
Prepaid expenses and other current assets
|
3
|
|
—
|
|
||||
|
Commodity contracts
|
Other non-current assets
|
4
|
|
—
|
|
||||
|
Total assets
|
|
$
|
47
|
|
$
|
31
|
|
||
|
Liabilities:
|
|
|
|
||||||
|
Derivative instruments designated as hedging instruments under U.S. GAAP:
|
|
|
|
||||||
|
Interest rate contracts
|
Other current liabilities
|
$
|
46
|
|
$
|
30
|
|
||
|
Foreign exchange forward contracts
|
Other current liabilities
|
2
|
|
1
|
|
||||
|
Interest rate contracts
|
Other non-current liabilities
|
—
|
|
3
|
|
||||
|
Derivative instruments not designated as hedging instruments under U.S. GAAP:
|
|
|
|
||||||
|
Commodity contracts
|
Other current liabilities
|
2
|
|
12
|
|
||||
|
Commodity contracts
|
Other non-current liabilities
|
—
|
|
—
|
|
||||
|
Total liabilities
|
|
$
|
50
|
|
$
|
46
|
|
||
14
DR PEPPER SNAPPLE GROUP, INC.
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
Statements of Income and Comprehensive Income for the
three and nine months ended September 30, 2012, and 2011
(in millions):
|
|
Amount of Gain (Loss) Recognized in Comprehensive Income
|
Amount of Loss Reclassified from AOCL into Income
|
Location of Loss Reclassified from AOCL into Income
|
||||||
|
For the three months ended September 30, 2012:
|
|
|
|
||||||
|
Interest rate contracts
|
$
|
(5
|
)
|
$
|
(1
|
)
|
Interest expense
|
||
|
Foreign exchange forward contracts
|
(4
|
)
|
—
|
|
Cost of sales
|
||||
|
Total
|
$
|
(9
|
)
|
$
|
(1
|
)
|
|
||
|
For the nine months ended September 30, 2012:
|
|||||||||
|
Interest rate contracts
|
$
|
(16
|
)
|
$
|
(2
|
)
|
Interest expense
|
||
|
Foreign exchange forward contracts
|
(4
|
)
|
(1
|
)
|
Cost of sales
|
||||
|
Total
|
$
|
(20
|
)
|
$
|
(3
|
)
|
|||
|
For the three months ended September 30, 2011:
|
|
|
|
||||||
|
Interest rate contracts
|
$
|
(51
|
)
|
$
|
—
|
|
Interest expense
|
||
|
Foreign exchange forward contracts
|
11
|
|
(1
|
)
|
Cost of sales
|
||||
|
Total
|
$
|
(40
|
)
|
$
|
(1
|
)
|
|
||
|
For the nine months ended September 30, 2011:
|
|
|
|
||||||
|
Interest rate contracts
|
$
|
(49
|
)
|
$
|
—
|
|
Interest expense
|
||
|
Foreign exchange forward contracts
|
6
|
|
(2
|
)
|
Cost of sales
|
||||
|
Total
|
$
|
(43
|
)
|
$
|
(2
|
)
|
|
||
There was no hedge ineffectiveness recognized in earnings for the
three and nine months ended September 30, 2012, and 2011
with respect to derivative instruments designated as cash flow hedges. During the next 12 months, the Company expects to reclassify net losses of
$9 million
from AOCL into net income.
15
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table presents the impact of derivative instruments designated as fair value hedging instruments under U.S. GAAP to the
unaudited Condensed Consolidated
Statements of Income for the
three and nine months ended September 30, 2012, and 2011
(in millions):
|
|
Amount of Gain
|
Location of Gain
|
||||
|
|
Recognized in Income
|
Recognized in Income
|
||||
|
For the three months ended September 30, 2012:
|
|
|
||||
|
Interest rate contracts
|
$
|
3
|
|
Interest expense
|
||
|
Total
|
$
|
3
|
|
|
||
|
For the nine months ended September 30, 2012:
|
||||||
|
Interest rate contracts
|
$
|
8
|
|
Interest expense
|
||
|
Total
|
$
|
8
|
|
|
||
|
For the three months ended September 30, 2011:
|
||||||
|
Interest rate contracts
|
$
|
4
|
|
Interest expense
|
||
|
Total
|
$
|
4
|
|
|||
|
For the nine months ended September 30, 2011:
|
||||||
|
Interest rate contracts
|
$
|
8
|
|
Interest expense
|
||
|
Total
|
$
|
8
|
|
|||
For the
three and nine months ended September 30, 2012
, a
$1 million
benefit due to hedge ineffectiveness was recognized in earnings with respect to derivative instruments designated as fair value hedges. For the
three and nine months ended September 30, 2011
,
$1 million
of hedge ineffectiveness was recognized in earnings with respect to derivative instruments designated as fair value hedges.
16
DR PEPPER SNAPPLE GROUP, INC.
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
Statements of Income for the
three and nine months ended September 30, 2012, and 2011
(in millions):
|
|
Amount of Gain (Loss)
|
Location of Gain (Loss)
|
||||
|
|
Recognized in Income
|
Recognized in Income
|
||||
|
For the three months ended September 30, 2012:
|
|
|
||||
|
Commodity contracts
|
$
|
10
|
|
Cost of sales
|
||
|
Commodity contracts
|
4
|
|
Selling, general and administrative expenses
|
|||
|
Total
|
$
|
14
|
|
|
||
|
For the nine months ended September 30, 2012:
|
||||||
|
Commodity contracts
|
$
|
3
|
|
Cost of sales
|
||
|
Commodity contracts
|
3
|
|
Selling, general and administrative expenses
|
|||
|
Total
|
$
|
6
|
|
|
||
|
For the three months ended September 30, 2011:
|
|
|
||||
|
Commodity contracts
|
$
|
(7
|
)
|
Cost of sales
|
||
|
Commodity contracts
|
(1
|
)
|
Selling, general and administrative expenses
|
|||
|
Total
|
$
|
(8
|
)
|
|
||
|
For the nine months ended September 30, 2011:
|
||||||
|
Commodity contracts
|
$
|
(7
|
)
|
Cost of sales
|
||
|
Commodity contracts
|
1
|
|
Selling, general and administrative expenses
|
|||
|
Total
|
$
|
(6
|
)
|
|
||
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.
17
DR PEPPER SNAPPLE GROUP, INC.
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, 2012, and December 31, 2011
(in millions):
|
|
September 30,
|
December 31,
|
|||||
|
2012
|
2011
|
||||||
|
Other non-current assets:
|
|
|
|||||
|
Long-term receivables from Mondelēz
|
$
|
436
|
|
$
|
430
|
|
|
|
Deferred financing costs, net
|
11
|
|
15
|
|
|||
|
Customer incentive programs
|
70
|
|
82
|
|
|||
|
Derivative instruments
|
32
|
|
23
|
|
|||
|
Other
|
34
|
|
23
|
|
|||
|
Total other non-current assets
|
$
|
583
|
|
$
|
573
|
|
|
|
Other non-current liabilities:
|
|
|
|||||
|
Long-term payables due to Mondelēz
|
$
|
99
|
|
$
|
102
|
|
|
|
Liabilities for unrecognized tax benefits and other tax related items
|
576
|
|
567
|
|
|||
|
Long-term pension and post-retirement liability
|
41
|
|
44
|
|
|||
|
Insurance reserves
|
74
|
|
54
|
|
|||
|
Other
|
43
|
|
47
|
|
|||
|
Total other non-current liabilities
|
$
|
833
|
|
$
|
814
|
|
|
|
8.
|
Income Taxes
|
The effective tax rates for the
three months ended
September 30, 2012
and
2011
were
36.3%
and
34.7%
, respectively. The effective tax rates for the
nine months ended
September 30, 2012
and
2011
were
35.8%
and
35.3%
, respectively. The prior year effective tax rates included certain state and federal income tax benefits, principally the domestic manufacturing deduction, related to the PepsiCo, Inc. ("PepsiCo") and The Coca-Cola Company ("Coca-Cola") licensing agreements executed in 2010. The impact of these benefits decreased the provision for income taxes for the three and nine months ended
September 30, 2011
by
$5 million
and
$14 million
, respectively. The impact of these benefits decreased the effective tax rate for the three and nine months ended September 30, 2011 by
2.1%
in each period.
The Company made no income tax payments for the three months ended September 30, 2012 and
$6 million
of income tax payments for the three months ended September 30, 2011 related to the licensing agreements with PepsiCo and Coca-Cola. For the nine months ended
September 30, 2012
and 2011, the Company made income tax payments of
$531 million
and
$43 million
, respectively, related to the licensing agreements with PepsiCo and Coca-Cola.
The Company's Canadian deferred tax assets as of
September 30, 2012
, included a separation related balance of
$120 million
that was offset by a liability due to Mondelēz of
$106 million
driven by the Tax Sharing and Indemnification Agreement ("Tax Indemnity Agreement"). Anticipated legislation in Canada could result in a future partial write-down of tax assets which would be offset to some extent by a partial write-down of the liability due to Mondelēz.
Under the Tax Indemnity Agreement, Mondelēz will indemnify DPS for net unrecognized tax benefits and other tax related items of
$436 million
. This balance increased by
$6 million
during the
nine months ended
September 30, 2012
, and was offset by indemnity income recorded as a component of other income in the
unaudited Condensed Consolidated
Statements of Income. In addition, pursuant to the terms of the Tax Indemnity Agreement, if DPS breaches certain covenants or other obligations or is involved in certain change-in-control transactions, Mondelēz may not be required to indemnify the Company.
18
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
9.
|
Fair Value of Financial Instruments
|
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, 2012
(in millions):
|
|
Fair Value Measurements at Reporting Date Using
|
||||||||||
|
|
Quoted Prices in Active Markets for Identical Assets
|
Significant Other Observable Inputs
|
Significant Unobservable Inputs
|
||||||||
|
|
Level 1
|
Level 2
|
Level 3
|
||||||||
|
Commodity contracts
|
$
|
—
|
|
$
|
7
|
|
$
|
—
|
|
||
|
Interest rate contracts
|
$
|
—
|
|
$
|
40
|
|
$
|
—
|
|
||
|
Total assets
|
$
|
—
|
|
$
|
47
|
|
$
|
—
|
|
||
|
Commodity contracts
|
$
|
—
|
|
$
|
2
|
|
$
|
—
|
|
||
|
Interest rate contracts
|
—
|
|
46
|
|
—
|
|
|||||
|
Foreign exchange forward contracts
|
—
|
|
2
|
|
—
|
|
|||||
|
Total liabilities
|
$
|
—
|
|
$
|
50
|
|
$
|
—
|
|
||
19
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table presents the fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of
December 31, 2011
(in millions):
|
|
Fair Value Measurements at Reporting Date Using
|
||||||||||
|
|
Quoted Prices in Active Markets for Identical Assets
|
Significant Other Observable Inputs
|
Significant Unobservable Inputs
|
||||||||
|
|
Level 1
|
Level 2
|
Level 3
|
||||||||
|
Interest rate contracts
|
$
|
—
|
|
$
|
30
|
|
$
|
—
|
|
||
|
Foreign exchange forward contracts
|
—
|
|
1
|
|
—
|
|
|||||
|
Total assets
|
$
|
—
|
|
$
|
31
|
|
$
|
—
|
|
||
|
Commodity contracts
|
$
|
—
|
|
$
|
12
|
|
$
|
—
|
|
||
|
Interest rate contracts
|
—
|
|
33
|
|
—
|
|
|||||
|
Foreign exchange forward contracts
|
—
|
|
1
|
|
—
|
|
|||||
|
Total liabilities
|
$
|
—
|
|
$
|
46
|
|
$
|
—
|
|
||
The fair values of commodity forward 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 forward contracts are valued using the market approach based on observable market transactions, primarily swap agreements, at the reporting date. Interest rate swap contracts are valued using models based primarily on readily observable market parameters, such as LIBOR forward rates, for all substantial terms of the Company's contracts and credit risk of the counterparties. 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, 2012, and December 31, 2011
, 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, 2012
.
The estimated fair values of other financial liabilities not measured at fair value on a recurring basis as of
September 30, 2012, and December 31, 2011
, are as follows (in millions):
|
|
September 30, 2012
|
December 31, 2011
|
|||||||||||||
|
|
Carrying Amount
|
Fair Value
|
Carrying Amount
|
Fair Value
|
|||||||||||
|
Long-term debt – 2012 Notes
(1)
|
$
|
451
|
|
$
|
452
|
|
$
|
452
|
|
$
|
457
|
|
|||
|
Long-term debt – 2013 Notes
|
250
|
|
257
|
|
250
|
|
267
|
|
|||||||
|
Long-term debt – 2016 Notes
|
500
|
|
522
|
|
500
|
|
521
|
|
|||||||
|
Long-term debt – 2018 Notes
|
724
|
|
913
|
|
724
|
|
882
|
|
|||||||
|
Long-term debt – 2019 Notes
(1)
|
254
|
|
258
|
|
250
|
|
249
|
|
|||||||
|
Long-term debt – 2021 Notes
(1)
|
255
|
|
261
|
|
249
|
|
250
|
|
|||||||
|
Long-term debt – 2038 Notes
(1)
|
276
|
|
358
|
|
276
|
|
353
|
|
|||||||
____________________________
|
(1)
|
The carrying amount includes adjustments related to the change in the fair value of interest rate swaps designated as fair value hedges on the 2012, 2019, 2021 and 2038 Notes. See Note 6 for further information regarding derivatives.
|
Capital leases have been excluded from the calculation of fair value for both
2012
and
2011
.
20
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The fair value amounts for cash and cash equivalents, accounts receivable, net, accounts payable and other current liabilities approximate carrying amounts due to the short maturities of these instruments. The fair value amounts of long term debt as of
September 30, 2012, and December 31, 2011
, were based on current market rates available to the Company (Level 2 inputs). 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 net periodic benefit costs for the Company's pensions plans for the
three and nine months ended September 30, 2012, and 2011
(in millions):
|
|
For the Three Months Ended September 30,
|
For the Nine Months Ended September 30,
|
|||||||||||||
|
|
2012
|
2011
|
2012
|
2011
|
|||||||||||
|
Service cost
|
$
|
—
|
|
$
|
—
|
|
$
|
2
|
|
$
|
1
|
|
|||
|
Interest cost
|
3
|
|
4
|
|
10
|
|
11
|
|
|||||||
|
Expected return on assets
|
(4
|
)
|
(3
|
)
|
(12
|
)
|
(11
|
)
|
|||||||
|
Recognition of actuarial loss
|
1
|
|
1
|
|
3
|
|
3
|
|
|||||||
|
Settlement loss
|
—
|
|
3
|
|
—
|
|
3
|
|
|||||||
|
Net periodic benefit costs
|
$
|
—
|
|
$
|
5
|
|
$
|
3
|
|
$
|
7
|
|
|||
The estimated prior service credit for the defined benefit plans that will be amortized from AOCL into periodic benefit cost during the remainder of
2012
is approximately
$1 million
.
Net periodic benefit costs for the U.S. post-retirement medical plans were a reduction of
$2 million
and
$3 million
for the
three and nine months ended September 30, 2012
, respectively. There were no significant net periodic benefit costs for the U.S. post-retirement benefit plans for the
three months ended
September 30, 2011
. Net periodic benefit costs for the U.S. post-retirement medical plans were a reduction of
$1 million
for the
nine months ended
September 30, 2011
.
The Company contributed
$1 million
to its pension plans during the
nine months ended
September 30, 2012
. There were no contributions made during the
three months ended
September 30, 2012
.
|
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, restricted stock units ("RSUs") and performance share units ("PSUs").
Stock-based compensation expense is recorded in selling, general and administrative expenses in the
unaudited Condensed Consolidated
Statements of Income. The components of stock-based compensation expense for the
three and nine months ended September 30, 2012, and 2011
are presented below (in millions):
|
For the Three Months Ended September 30,
|
For the Nine Months Ended September 30,
|
||||||||||||||
|
|
2012
|
2011
|
2012
|
2011
|
|||||||||||
|
Total stock-based compensation expense
|
$
|
9
|
|
$
|
7
|
|
$
|
26
|
|
$
|
24
|
|
|||
|
Income tax benefit recognized in the income statement
|
(2
|
)
|
(2
|
)
|
(8
|
)
|
(8
|
)
|
|||||||
|
Stock-based compensation expense, net of tax
|
$
|
7
|
|
$
|
5
|
|
$
|
18
|
|
$
|
16
|
|
|||
21
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Stock Options
The table below summarizes stock option activity for the
nine months ended
September 30, 2012
:
|
|
Stock Options
|
Weighted Average Exercise Price
|
Weighted Average Remaining Contractual Term (Years)
|
Aggregate Intrinsic Value (in millions)
|
||||||||
|
Outstanding as of December 31, 2011
|
2,317,342
|
|
$
|
28.25
|
|
8.04
|
$
|
26
|
|
|||
|
Granted
|
670,574
|
|
37.80
|
|
|
|
||||||
|
Exercised
|
(909,081
|
)
|
22.89
|
|
|
17
|
|
|||||
|
Forfeited or expired
|
—
|
|
—
|
|
|
|
||||||
|
Outstanding as of September 30, 2012
|
2,078,835
|
|
33.67
|
|
8.15
|
23
|
|
|||||
|
Exercisable as of September 30, 2012
|
623,505
|
|
27.55
|
|
6.94
|
11
|
|
|||||
As of
September 30, 2012
, there was
$7 million
of unrecognized compensation cost related to unvested stock options granted under the DPS Stock Plans that is expected to be recognized over a weighted average period of
1.10 years
.
Restricted Stock Units and Performance Share Units
The table below summarizes RSU and PSU activity for the
nine months ended
September 30, 2012
:
|
|
RSUs/PSUs
|
Weighted Average Grant Date Fair Value
|
Weighted Average Remaining Contractual Term (Years)
|
Aggregate Intrinsic Value (in millions)
|
||||||||
|
Outstanding as of December 31, 2011
|
3,321,255
|
|
$
|
25.41
|
|
1.02
|
$
|
131
|
|
|||
|
Granted
|
993,735
|
|
37.83
|
|
|
|
||||||
|
Vested and released
|
(1,561,648
|
)
|
15.51
|
|
|
|
||||||
|
Forfeited
|
(38,568
|
)
|
34.56
|
|
|
|
||||||
|
Outstanding as of September 30, 2012
|
2,714,774
|
|
35.52
|
|
1.48
|
121
|
|
|||||
As of
September 30, 2012
, there was
$51 million
of unrecognized compensation cost related to unvested RSUs and PSUs granted under the DPS Stock Plans that is expected to be recognized over a weighted average period of
1.48 years
.
22
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
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 presents the basic and diluted EPS and the Company's basic and diluted shares outstanding (in millions, except per share data):
|
|
For the Three Months Ended September 30,
|
For the Nine Months Ended September 30,
|
|||||||||||||
|
|
2012
|
2011
|
2012
|
2011
|
|||||||||||
|
Basic EPS:
|
|
|
|||||||||||||
|
Net income
|
$
|
179
|
|
$
|
154
|
|
$
|
459
|
|
$
|
440
|
|
|||
|
Weighted average common shares outstanding
|
210.4
|
|
216.0
|
|
211.6
|
|
220.5
|
|
|||||||
|
Earnings per common share — basic
|
$
|
0.85
|
|
$
|
0.71
|
|
$
|
2.17
|
|
$
|
2.00
|
|
|||
|
Diluted EPS:
|
|
|
|
|
|||||||||||
|
Net income
|
$
|
179
|
|
$
|
154
|
|
$
|
459
|
|
$
|
440
|
|
|||
|
Weighted average common shares outstanding
|
210.4
|
|
216.0
|
|
211.6
|
|
220.5
|
|
|||||||
|
Effect of dilutive securities:
|
|
|
|
|
|||||||||||
|
Stock options, RSUs, PSUs and dividend equivalent units
|
1.6
|
|
2.2
|
|
1.7
|
|
2.4
|
|
|||||||
|
Weighted average common shares outstanding and common stock equivalents
|
212.0
|
|
218.2
|
|
213.3
|
|
222.9
|
|
|||||||
|
Earnings per common share — diluted
|
$
|
0.84
|
|
$
|
0.71
|
|
$
|
2.15
|
|
$
|
1.97
|
|
|||
Stock options, RSUs, PSUs and dividend equivalent units totaling
0.4 million
shares and
0.5 million
shares were excluded from the diluted weighted average shares outstanding for the
three and nine months ended September 30, 2012
, respectively, as they were not dilutive. Stock options, RSUs, PSUs and dividend equivalent units totaling
0.9 million
shares and
0.8 million
shares were excluded from the diluted weighted average shares outstanding for the
three and nine months ended September 30, 2011
, respectively, 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. As of
September 30, 2012
, there were
120,735
dividend equivalent units, which will vest at the time that the underlying RSU vests.
During 2010 and 2011, the Board authorized a total aggregate share repurchase plan of
$2,000 million
. The Company repurchased and retired
2.5 million
shares of common stock valued at approximately
$110 million
and
6.3 million
shares of common stock valued at approximately
$262 million
for the
three and nine months ended September 30, 2012
, respectively. The Company repurchased and retired
2.7 million
shares of common stock valued at approximately
$100 million
and
11.1 million
shares of common stock valued at approximately
$425 million
for the
three and nine months ended September 30, 2011
, respectively. These amounts were recorded as a reduction of equity, primarily additional paid-in capital. As of
September 30, 2012
,
$1,110 million
is available for share repurchase under the Board authorization.
|
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.
23
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Robert M. Ward, et al. v. The American Bottling Company
In March 2009, Robert M. Ward, et al., as plaintiffs, commenced litigation in the U.S. District Court, Central District of California, Western Division alleging age discrimination against Cadbury Schweppes Bottling Group, Inc. (now The American Bottling Company), et al., as defendants. The defendants are subsidiaries of the Company. The complaint related to activities which principally occurred before the Company's spin off from Cadbury in 2008. On December 7, 2011, the jury returned a verdict in favor of the six plaintiffs and awarded damages of approximately
$18 million
, which amount was accrued as of
September 30, 2012
. On June 25, 2012, the Company filed a notice of appeal with the U.S. Court of Appeals for the Ninth Circuit regarding the judgment and denial of defendants' motions.
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 environmental, 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, 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 or 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 through
September 30, 2012
, the Company has paid approximately
$425,000
since the notification for DPS' allocation of costs related to the study for this site.
|
14.
|
Accumulated Other Comprehensive Loss
|
The following table provides a summary of changes in the balances of each component of AOCL, net of taxes, for the
nine months ended September 30, 2012, and the year ended December 31, 2011
(in millions):
|
|
Foreign Currency Translation
|
Change in Pension Liability
|
Cash Flow Hedges
|
Accumulated Other Comprehensive Loss
|
|||||||||||
|
Balance as of December 31, 2010
|
$
|
7
|
|
$
|
(31
|
)
|
$
|
(4
|
)
|
$
|
(28
|
)
|
|||
|
Current period other comprehensive income
|
(34
|
)
|
(17
|
)
|
(31
|
)
|
(82
|
)
|
|||||||
|
Balance as of December 31, 2011
|
(27
|
)
|
(48
|
)
|
(35
|
)
|
(110
|
)
|
|||||||
|
Current period other comprehensive income
|
21
|
|
1
|
|
(10
|
)
|
12
|
|
|||||||
|
Balance as of September 30, 2012
|
$
|
(6
|
)
|
$
|
(47
|
)
|
$
|
(45
|
)
|
$
|
(98
|
)
|
|||
|
15.
|
Segments
|
As of
September 30, 2012
, 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 U.S. and Canada. Most of the brands in this segment are carbonated soft drink brands.
|
|
•
|
The Packaged Beverages segment reflects sales in the U.S. and Canada from the manufacture and distribution of finished beverages and other products, including sales of 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.
24
DR PEPPER SNAPPLE GROUP, INC.
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, 2012, and 2011
is as follows (in millions):
|
|
For the Three Months Ended September 30,
|
For the Nine Months Ended September 30,
|
|||||||||||||
|
|
2012
|
2011
|
2012
|
2011
|
|||||||||||
|
Segment Results – Net sales
|
|
|
|||||||||||||
|
Beverage Concentrates
|
$
|
303
|
|
$
|
292
|
|
$
|
888
|
|
$
|
868
|
|
|||
|
Packaged Beverages
|
1,120
|
|
1,132
|
|
3,314
|
|
3,252
|
|
|||||||
|
Latin America Beverages
|
105
|
|
105
|
|
309
|
|
322
|
|
|||||||
|
Net sales
|
$
|
1,528
|
|
$
|
1,529
|
|
$
|
4,511
|
|
$
|
4,442
|
|
|||
|
|
For the Three Months Ended September 30,
|
For the Nine Months Ended September 30,
|
|||||||||||||
|
|
2012
|
2011
|
2012
|
2011
|
|||||||||||
|
Segment Results – SOP
|
|||||||||||||||
|
Beverage Concentrates
|
$
|
198
|
|
$
|
196
|
|
$
|
552
|
|
$
|
567
|
|
|||
|
Packaged Beverages
|
147
|
|
143
|
|
408
|
|
391
|
|
|||||||
|
Latin America Beverages
|
14
|
|
10
|
|
37
|
|
34
|
|
|||||||
|
Total SOP
|
359
|
|
349
|
|
997
|
|
992
|
|
|||||||
|
Unallocated corporate costs
|
47
|
|
82
|
|
189
|
|
230
|
|
|||||||
|
Other operating expense (income), net
|
4
|
|
6
|
|
8
|
|
9
|
|
|||||||
|
Income from operations
|
308
|
|
261
|
|
800
|
|
753
|
|
|||||||
|
Interest expense, net
|
31
|
|
29
|
|
93
|
|
83
|
|
|||||||
|
Other income, net
|
(4
|
)
|
(4
|
)
|
(8
|
)
|
(9
|
)
|
|||||||
|
Income before provision for income taxes and equity in earnings of unconsolidated subsidiaries
|
$
|
281
|
|
$
|
236
|
|
$
|
715
|
|
$
|
679
|
|
|||
|
16.
|
Guarantor and Non-Guarantor Financial Information
|
The Company's 2012, 2013, 2016, 2018, 2019, 2021 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 U.S. (collectively, the "Non-Guarantors") guarantee the Notes.
The following schedules present the financial information for the
three and nine months ended September 30, 2012, and 2011
, and as of
September 30, 2012, and December 31, 2011
, 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 (in millions).
25
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
|
Condensed Consolidating Statements of Income
|
||||||||||||||||||
|
|
For the Three Months Ended September 30, 2012
|
||||||||||||||||||
|
|
Parent
|
Guarantors
|
Non-Guarantors
|
Eliminations
|
Total
|
||||||||||||||
|
Net sales
|
$
|
—
|
|
$
|
1,388
|
|
$
|
146
|
|
$
|
(6
|
)
|
$
|
1,528
|
|
||||
|
Cost of sales
|
—
|
|
569
|
|
63
|
|
(6
|
)
|
626
|
|
|||||||||
|
Gross profit
|
—
|
|
819
|
|
83
|
|
—
|
|
902
|
|
|||||||||
|
Selling, general and administrative expenses
|
—
|
|
510
|
|
51
|
|
—
|
|
561
|
|
|||||||||
|
Depreciation and amortization
|
—
|
|
27
|
|
2
|
|
—
|
|
29
|
|
|||||||||
|
Other operating expense (income), net
|
—
|
|
4
|
|
—
|
|
—
|
|
4
|
|
|||||||||
|
Income from operations
|
—
|
|
278
|
|
30
|
|
—
|
|
308
|
|
|||||||||
|
Interest expense
|
29
|
|
24
|
|
—
|
|
(22
|
)
|
31
|
|
|||||||||
|
Interest income
|
(20
|
)
|
—
|
|
(2
|
)
|
22
|
|
—
|
|
|||||||||
|
Other (income) expense, net
|
(2
|
)
|
(2
|
)
|
—
|
|
—
|
|
(4
|
)
|
|||||||||
|
Income (loss) before provision for income taxes and equity in earnings of subsidiaries
|
(7
|
)
|
256
|
|
32
|
|
—
|
|
281
|
|
|||||||||
|
Provision for income taxes
|
(4
|
)
|
99
|
|
7
|
|
—
|
|
102
|
|
|||||||||
|
Income (loss) before equity in earnings of subsidiaries
|
(3
|
)
|
157
|
|
25
|
|
—
|
|
179
|
|
|||||||||
|
Equity in earnings of consolidated subsidiaries
|
182
|
|
25
|
|
—
|
|
(207
|
)
|
—
|
|
|||||||||
|
Equity in earnings of unconsolidated subsidiaries, net of tax
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|||||||||
|
Net income
|
$
|
179
|
|
$
|
182
|
|
$
|
25
|
|
$
|
(207
|
)
|
$
|
179
|
|
||||
26
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
|
Condensed Consolidating Statements of Income
|
||||||||||||||||||
|
|
For the Three Months Ended September 30, 2011
|
||||||||||||||||||
|
|
Parent
|
Guarantors
|
Non-Guarantors
|
Eliminations
|
Total
|
||||||||||||||
|
Net sales
|
$
|
—
|
|
$
|
1,391
|
|
$
|
147
|
|
$
|
(9
|
)
|
$
|
1,529
|
|
||||
|
Cost of sales
|
—
|
|
610
|
|
71
|
|
(9
|
)
|
672
|
|
|||||||||
|
Gross profit
|
—
|
|
781
|
|
76
|
|
—
|
|
857
|
|
|||||||||
|
Selling, general and administrative expenses
|
—
|
|
507
|
|
52
|
|
—
|
|
559
|
|
|||||||||
|
Depreciation and amortization
|
—
|
|
28
|
|
3
|
|
—
|
|
31
|
|
|||||||||
|
Other operating expense (income), net
|
—
|
|
6
|
|
—
|
|
—
|
|
6
|
|
|||||||||
|
Income from operations
|
—
|
|
240
|
|
21
|
|
—
|
|
261
|
|
|||||||||
|
Interest expense
|
30
|
|
20
|
|
—
|
|
(20
|
)
|
30
|
|
|||||||||
|
Interest income
|
(19
|
)
|
—
|
|
(2
|
)
|
20
|
|
(1
|
)
|
|||||||||
|
Other (income) expense, net
|
(4
|
)
|
(2
|
)
|
2
|
|
—
|
|
(4
|
)
|
|||||||||
|
Income (loss) before provision for income taxes and equity in earnings of subsidiaries
|
(7
|
)
|
222
|
|
21
|
|
—
|
|
236
|
|
|||||||||
|
Provision for income taxes
|
(3
|
)
|
79
|
|
6
|
|
—
|
|
82
|
|
|||||||||
|
Income (loss) before equity in earnings of subsidiaries
|
(4
|
)
|
143
|
|
15
|
|
—
|
|
154
|
|
|||||||||
|
Equity in earnings of consolidated subsidiaries
|
158
|
|
15
|
|
—
|
|
(173
|
)
|
—
|
|
|||||||||
|
Equity in earnings of unconsolidated subsidiaries, net of tax
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|||||||||
|
Net income
|
$
|
154
|
|
$
|
158
|
|
$
|
15
|
|
$
|
(173
|
)
|
$
|
154
|
|
||||
27
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
|
Condensed Consolidating Statements of Income
|
||||||||||||||||||
|
|
For the Nine Months Ended September 30, 2012
|
||||||||||||||||||
|
|
Parent
|
Guarantors
|
Non-Guarantors
|
Eliminations
|
Total
|
||||||||||||||
|
Net sales
|
$
|
—
|
|
$
|
4,102
|
|
$
|
428
|
|
$
|
(19
|
)
|
$
|
4,511
|
|
||||
|
Cost of sales
|
—
|
|
1,721
|
|
193
|
|
(19
|
)
|
1,895
|
|
|||||||||
|
Gross profit
|
—
|
|
2,381
|
|
235
|
|
—
|
|
2,616
|
|
|||||||||
|
Selling, general and administrative expenses
|
—
|
|
1,559
|
|
154
|
|
—
|
|
1,713
|
|
|||||||||
|
Depreciation and amortization
|
—
|
|
90
|
|
5
|
|
—
|
|
95
|
|
|||||||||
|
Other operating expense (income), net
|
—
|
|
8
|
|
—
|
|
—
|
|
8
|
|
|||||||||
|
Income from operations
|
—
|
|
724
|
|
76
|
|
—
|
|
800
|
|
|||||||||
|
Interest expense
|
92
|
|
67
|
|
—
|
|
(65
|
)
|
94
|
|
|||||||||
|
Interest income
|
(61
|
)
|
—
|
|
(5
|
)
|
65
|
|
(1
|
)
|
|||||||||
|
Other (income) expense, net
|
(8
|
)
|
(3
|
)
|
3
|
|
—
|
|
(8
|
)
|
|||||||||
|
Income (loss) before provision for income taxes and equity in earnings of subsidiaries
|
(23
|
)
|
660
|
|
78
|
|
—
|
|
715
|
|
|||||||||
|
Provision for income taxes
|
(11
|
)
|
253
|
|
14
|
|
—
|
|
256
|
|
|||||||||
|
Income (loss) before equity in earnings of subsidiaries
|
(12
|
)
|
407
|
|
64
|
|
—
|
|
459
|
|
|||||||||
|
Equity in earnings of consolidated subsidiaries
|
471
|
|
64
|
|
—
|
|
(535
|
)
|
—
|
|
|||||||||
|
Equity in earnings of unconsolidated subsidiaries, net of tax
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|||||||||
|
Net income
|
$
|
459
|
|
$
|
471
|
|
$
|
64
|
|
$
|
(535
|
)
|
$
|
459
|
|
||||
28
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
|
Condensed Consolidating Statements of Income
|
||||||||||||||||||
|
|
For the Nine Months Ended September 30, 2011
|
||||||||||||||||||
|
|
Parent
|
Guarantors
|
Non-Guarantors
|
Eliminations
|
Total
|
||||||||||||||
|
Net sales
|
$
|
—
|
|
$
|
4,017
|
|
$
|
444
|
|
$
|
(19
|
)
|
$
|
4,442
|
|
||||
|
Cost of sales
|
—
|
|
1,700
|
|
200
|
|
(19
|
)
|
1,881
|
|
|||||||||
|
Gross profit
|
—
|
|
2,317
|
|
244
|
|
—
|
|
2,561
|
|
|||||||||
|
Selling, general and administrative expenses
|
—
|
|
1,532
|
|
172
|
|
—
|
|
1,704
|
|
|||||||||
|
Depreciation and amortization
|
—
|
|
89
|
|
6
|
|
—
|
|
95
|
|
|||||||||
|
Other operating expense (income), net
|
—
|
|
9
|
|
—
|
|
—
|
|
9
|
|
|||||||||
|
Income from operations
|
—
|
|
687
|
|
66
|
|
—
|
|
753
|
|
|||||||||
|
Interest expense
|
85
|
|
58
|
|
—
|
|
(58
|
)
|
85
|
|
|||||||||
|
Interest income
|
(56
|
)
|
(1
|
)
|
(3
|
)
|
58
|
|
(2
|
)
|
|||||||||
|
Other (income) expense, net
|
(9
|
)
|
(2
|
)
|
2
|
|
—
|
|
(9
|
)
|
|||||||||
|
Income (loss) before provision for income taxes and equity in earnings of subsidiaries
|
(20
|
)
|
632
|
|
67
|
|
—
|
|
679
|
|
|||||||||
|
Provision for income taxes
|
(10
|
)
|
232
|
|
18
|
|
—
|
|
240
|
|
|||||||||
|
Income (loss) before equity in earnings of subsidiaries
|
(10
|
)
|
400
|
|
49
|
|
—
|
|
439
|
|
|||||||||
|
Equity in earnings of consolidated subsidiaries
|
450
|
|
50
|
|
—
|
|
(500
|
)
|
—
|
|
|||||||||
|
Equity in earnings of unconsolidated subsidiaries, net of tax
|
—
|
|
—
|
|
1
|
|
—
|
|
1
|
|
|||||||||
|
Net income
|
$
|
440
|
|
$
|
450
|
|
$
|
50
|
|
$
|
(500
|
)
|
$
|
440
|
|
||||
29
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
|
Condensed Consolidating Statements of Comprehensive Income
|
||||||||||||||||||
|
|
For the Three Months Ended September 30, 2012
|
||||||||||||||||||
|
|
Parent
|
Guarantors
|
Non-Guarantors
|
Eliminations
|
Total
|
||||||||||||||
|
Comprehensive income
|
$
|
186
|
|
$
|
195
|
|
$
|
43
|
|
$
|
(238
|
)
|
$
|
186
|
|
||||
|
|
Condensed Consolidating Statements of Comprehensive Income
|
||||||||||||||||||
|
|
For the Three Months Ended September 30, 2011
|
||||||||||||||||||
|
|
Parent
|
Guarantors
|
Non-Guarantors
|
Eliminations
|
Total
|
||||||||||||||
|
Comprehensive income
|
$
|
79
|
|
$
|
106
|
|
$
|
(41
|
)
|
$
|
(65
|
)
|
$
|
79
|
|
||||
|
|
Condensed Consolidating Statements of Comprehensive Income
|
||||||||||||||||||
|
|
For the Nine Months Ended September 30, 2012
|
||||||||||||||||||
|
|
Parent
|
Guarantors
|
Non-Guarantors
|
Eliminations
|
Total
|
||||||||||||||
|
Comprehensive income
|
$
|
471
|
|
$
|
495
|
|
$
|
92
|
|
$
|
(587
|
)
|
$
|
471
|
|
||||
|
|
Condensed Consolidating Statements of Comprehensive Income
|
||||||||||||||||||
|
|
For the Nine Months Ended September 30, 2011
|
||||||||||||||||||
|
|
Parent
|
Guarantors
|
Non-Guarantors
|
Eliminations
|
Total
|
||||||||||||||
|
Comprehensive income
|
$
|
371
|
|
$
|
406
|
|
$
|
11
|
|
$
|
(417
|
)
|
$
|
371
|
|
||||
30
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
|
Condensed Consolidating Balance Sheets
|
||||||||||||||||||
|
|
As of September 30, 2012
|
||||||||||||||||||
|
|
Parent
|
Guarantors
|
Non-Guarantors
|
Eliminations
|
Total
|
||||||||||||||
|
Current assets:
|
|
|
|
|
|
||||||||||||||
|
Cash and cash equivalents
|
$
|
—
|
|
$
|
294
|
|
$
|
89
|
|
$
|
—
|
|
$
|
383
|
|
||||
|
Accounts receivable:
|
|
|
|
|
|
||||||||||||||
|
Trade, net
|
—
|
|
496
|
|
50
|
|
—
|
|
546
|
|
|||||||||
|
Other
|
4
|
|
35
|
|
13
|
|
—
|
|
52
|
|
|||||||||
|
Related party receivable
|
12
|
|
7
|
|
—
|
|
(19
|
)
|
—
|
|
|||||||||
|
Inventories
|
—
|
|
179
|
|
28
|
|
—
|
|
207
|
|
|||||||||
|
Deferred tax assets
|
18
|
|
70
|
|
6
|
|
—
|
|
94
|
|
|||||||||
|
Prepaid expenses and other current assets
|
159
|
|
88
|
|
17
|
|
(150
|
)
|
114
|
|
|||||||||
|
Total current assets
|
193
|
|
1,169
|
|
203
|
|
(169
|
)
|
1,396
|
|
|||||||||
|
Property, plant and equipment, net
|
—
|
|
1,113
|
|
81
|
|
—
|
|
1,194
|
|
|||||||||
|
Investments in consolidated subsidiaries
|
4,160
|
|
602
|
|
—
|
|
(4,762
|
)
|
—
|
|
|||||||||
|
Investments in unconsolidated subsidiaries
|
1
|
|
—
|
|
13
|
|
—
|
|
14
|
|
|||||||||
|
Goodwill
|
—
|
|
2,961
|
|
22
|
|
—
|
|
2,983
|
|
|||||||||
|
Other intangible assets, net
|
—
|
|
2,605
|
|
80
|
|
—
|
|
2,685
|
|
|||||||||
|
Long-term receivable, related parties
|
2,978
|
|
2,518
|
|
206
|
|
(5,702
|
)
|
—
|
|
|||||||||
|
Other non-current assets
|
475
|
|
101
|
|
7
|
|
—
|
|
583
|
|
|||||||||
|
Non-current deferred tax assets
|
8
|
|
—
|
|
134
|
|
(8
|
)
|
134
|
|
|||||||||
|
Total assets
|
$
|
7,815
|
|
$
|
11,069
|
|
$
|
746
|
|
$
|
(10,641
|
)
|
$
|
8,989
|
|
||||
|
Current liabilities:
|
|
|
|
|
|
||||||||||||||
|
Accounts payable
|
$
|
—
|
|
$
|
274
|
|
$
|
23
|
|
$
|
—
|
|
$
|
297
|
|
||||
|
Related party payable
|
—
|
|
12
|
|
7
|
|
(19
|
)
|
—
|
|
|||||||||
|
Deferred revenue
|
—
|
|
63
|
|
2
|
|
—
|
|
65
|
|
|||||||||
|
Current portion of long-term obligations
|
701
|
|
—
|
|
—
|
|
—
|
|
701
|
|
|||||||||
|
Income taxes payable
|
—
|
|
194
|
|
4
|
|
(150
|
)
|
48
|
|
|||||||||
|
Other current liabilities
|
171
|
|
412
|
|
42
|
|
—
|
|
625
|
|
|||||||||
|
Total current liabilities
|
872
|
|
955
|
|
78
|
|
(169
|
)
|
1,736
|
|
|||||||||
|
Long-term obligations to third parties
|
2,009
|
|
56
|
|
—
|
|
—
|
|
2,065
|
|
|||||||||
|
Long-term obligations to related parties
|
2,518
|
|
3,184
|
|
—
|
|
(5,702
|
)
|
—
|
|
|||||||||
|
Non-current deferred tax liabilities
|
—
|
|
643
|
|
—
|
|
(8
|
)
|
635
|
|
|||||||||
|
Non-current deferred revenue
|
—
|
|
1,357
|
|
45
|
|
—
|
|
1,402
|
|
|||||||||
|
Other non-current liabilities
|
98
|
|
714
|
|
21
|
|
—
|
|
833
|
|
|||||||||
|
Total liabilities
|
5,497
|
|
6,909
|
|
144
|
|
(5,879
|
)
|
6,671
|
|
|||||||||
|
Total stockholders' equity
|
2,318
|
|
4,160
|
|
602
|
|
(4,762
|
)
|
2,318
|
|
|||||||||
|
Total liabilities and stockholders' equity
|
$
|
7,815
|
|
$
|
11,069
|
|
$
|
746
|
|
$
|
(10,641
|
)
|
$
|
8,989
|
|
||||
31
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
|
Condensed Consolidating Balance Sheets
|
||||||||||||||||||
|
|
As of December 31, 2011
|
||||||||||||||||||
|
|
Parent
|
Guarantors
|
Non-Guarantors
|
Eliminations
|
Total
|
||||||||||||||
|
Current assets:
|
|
|
|
|
|
||||||||||||||
|
Cash and cash equivalents
|
$
|
—
|
|
$
|
641
|
|
$
|
60
|
|
$
|
—
|
|
$
|
701
|
|
||||
|
Accounts receivable:
|
|
|
|
|
|
||||||||||||||
|
Trade, net
|
—
|
|
528
|
|
57
|
|
—
|
|
585
|
|
|||||||||
|
Other
|
2
|
|
28
|
|
20
|
|
—
|
|
50
|
|
|||||||||
|
Related party receivable
|
12
|
|
9
|
|
—
|
|
(21
|
)
|
—
|
|
|||||||||
|
Inventories
|
—
|
|
192
|
|
20
|
|
—
|
|
212
|
|
|||||||||
|
Deferred tax assets
|
12
|
|
79
|
|
5
|
|
—
|
|
96
|
|
|||||||||
|
Prepaid and other current assets
|
145
|
|
82
|
|
25
|
|
(139
|
)
|
113
|
|
|||||||||
|
Total current assets
|
171
|
|
1,559
|
|
187
|
|
(160
|
)
|
1,757
|
|
|||||||||
|
Property, plant and equipment, net
|
—
|
|
1,080
|
|
72
|
|
—
|
|
1,152
|
|
|||||||||
|
Investments in consolidated subsidiaries
|
3,602
|
|
530
|
|
—
|
|
(4,132
|
)
|
—
|
|
|||||||||
|
Investments in unconsolidated subsidiaries
|
2
|
|
—
|
|
11
|
|
—
|
|
13
|
|
|||||||||
|
Goodwill
|
—
|
|
2,961
|
|
19
|
|
—
|
|
2,980
|
|
|||||||||
|
Other intangible assets, net
|
—
|
|
2,602
|
|
75
|
|
—
|
|
2,677
|
|
|||||||||
|
Long-term receivable, related parties
|
2,917
|
|
1,970
|
|
175
|
|
(5,062
|
)
|
—
|
|
|||||||||
|
Other non-current assets
|
467
|
|
100
|
|
6
|
|
—
|
|
573
|
|
|||||||||
|
Non-current deferred tax assets
|
9
|
|
—
|
|
131
|
|
(9
|
)
|
131
|
|
|||||||||
|
Total assets
|
$
|
7,168
|
|
$
|
10,802
|
|
$
|
676
|
|
$
|
(9,363
|
)
|
$
|
9,283
|
|
||||
|
Current liabilities:
|
|
|
|
|
|
||||||||||||||
|
Accounts payable
|
$
|
—
|
|
$
|
237
|
|
$
|
28
|
|
$
|
—
|
|
$
|
265
|
|
||||
|
Related party payable
|
—
|
|
12
|
|
9
|
|
(21
|
)
|
—
|
|
|||||||||
|
Deferred revenue
|
—
|
|
63
|
|
2
|
|
—
|
|
65
|
|
|||||||||
|
Current portion of long-term obligations
|
452
|
|
—
|
|
—
|
|
—
|
|
452
|
|
|||||||||
|
Income taxes payable
|
—
|
|
668
|
|
1
|
|
(139
|
)
|
530
|
|
|||||||||
|
Other current liabilities
|
128
|
|
432
|
|
43
|
|
—
|
|
603
|
|
|||||||||
|
Total current liabilities
|
580
|
|
1,412
|
|
83
|
|
(160
|
)
|
1,915
|
|
|||||||||
|
Long-term obligations to third parties
|
2,249
|
|
7
|
|
—
|
|
—
|
|
2,256
|
|
|||||||||
|
Long-term obligations to related parties
|
1,970
|
|
3,092
|
|
—
|
|
(5,062
|
)
|
—
|
|
|||||||||
|
Non-current deferred tax liabilities
|
—
|
|
595
|
|
—
|
|
(9
|
)
|
586
|
|
|||||||||
|
Non-current deferred revenue
|
1
|
|
1,404
|
|
44
|
|
—
|
|
1,449
|
|
|||||||||
|
Other non-current liabilities
|
105
|
|
690
|
|
19
|
|
—
|
|
814
|
|
|||||||||
|
Total liabilities
|
4,905
|
|
7,200
|
|
146
|
|
(5,231
|
)
|
7,020
|
|
|||||||||
|
Total stockholders' equity
|
2,263
|
|
3,602
|
|
530
|
|
(4,132
|
)
|
2,263
|
|
|||||||||
|
Total liabilities and stockholders' equity
|
$
|
7,168
|
|
$
|
10,802
|
|
$
|
676
|
|
$
|
(9,363
|
)
|
$
|
9,283
|
|
||||
32
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
|
Condensed Consolidating Statements of Cash Flows
|
||||||||||||||||||
|
|
For the Nine Months Ended September 30, 2012
|
||||||||||||||||||
|
|
Parent
|
Guarantors
|
Non-Guarantors
|
Eliminations
|
Total
|
||||||||||||||
|
Operating activities:
|
|
|
|
|
|
||||||||||||||
|
Net cash (used in) provided by operating activities
|
$
|
(92
|
)
|
$
|
270
|
|
$
|
86
|
|
$
|
—
|
|
$
|
264
|
|
||||
|
Investing activities:
|
|
|
|
|
|
||||||||||||||
|
Purchase of property, plant and equipment
|
—
|
|
(128
|
)
|
(15
|
)
|
—
|
|
(143
|
)
|
|||||||||
|
Return of capital
|
—
|
|
21
|
|
(21
|
)
|
—
|
|
—
|
|
|||||||||
|
Purchase of intangible assets
|
—
|
|
(7
|
)
|
—
|
|
—
|
|
(7
|
)
|
|||||||||
|
Proceeds from disposals of property, plant and equipment
|
—
|
|
6
|
|
—
|
|
—
|
|
6
|
|
|||||||||
|
Issuance of related party notes receivable
|
—
|
|
(548
|
)
|
(25
|
)
|
573
|
|
—
|
|
|||||||||
|
Net cash (used in) provided by investing activities
|
—
|
|
(656
|
)
|
(61
|
)
|
573
|
|
(144
|
)
|
|||||||||
|
Financing activities:
|
|
|
|
|
|
||||||||||||||
|
Proceeds from issuance of related party long-term debt
|
548
|
|
25
|
|
—
|
|
(573
|
)
|
—
|
|
|||||||||
|
Repurchase of shares of common stock
|
(262
|
)
|
—
|
|
—
|
|
—
|
|
(262
|
)
|
|||||||||
|
Dividends paid
|
(213
|
)
|
—
|
|
—
|
|
—
|
|
(213
|
)
|
|||||||||
|
Proceeds from stock options exercised
|
21
|
|
—
|
|
—
|
|
—
|
|
21
|
|
|||||||||
|
Excess tax benefit on stock-based compensation
|
—
|
|
16
|
|
—
|
|
—
|
|
16
|
|
|||||||||
|
Deferred financing charges paid
|
(1
|
)
|
—
|
|
—
|
|
—
|
|
(1
|
)
|
|||||||||
|
Other, net
|
(1
|
)
|
(2
|
)
|
—
|
|
—
|
|
(3
|
)
|
|||||||||
|
Net cash (used in) provided by financing activities
|
92
|
|
39
|
|
—
|
|
(573
|
)
|
(442
|
)
|
|||||||||
|
Cash and cash equivalents — net change from:
|
|
|
|
|
|
||||||||||||||
|
Operating, investing and financing activities
|
—
|
|
(347
|
)
|
25
|
|
—
|
|
(322
|
)
|
|||||||||
|
Effect of exchange rate changes on cash and cash equivalents
|
—
|
|
—
|
|
4
|
|
—
|
|
4
|
|
|||||||||
|
Cash and cash equivalents at beginning of period
|
—
|
|
641
|
|
60
|
|
—
|
|
701
|
|
|||||||||
|
Cash and cash equivalents at end of period
|
$
|
—
|
|
$
|
294
|
|
$
|
89
|
|
$
|
—
|
|
$
|
383
|
|
||||
33
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
|
Condensed Consolidating Statements of Cash Flows
|
||||||||||||||||||
|
|
For the Nine Months Ended September 30, 2011
|
||||||||||||||||||
|
|
Parent
|
Guarantors
|
Non-Guarantors
|
Eliminations
|
Total
|
||||||||||||||
|
Operating activities:
|
|
|
|
|
|
||||||||||||||
|
Net cash (used in) provided by operating activities
|
$
|
(75
|
)
|
$
|
603
|
|
$
|
53
|
|
$
|
(1
|
)
|
$
|
580
|
|
||||
|
Investing activities:
|
|
|
|
|
|||||||||||||||
|
Purchase of property, plant and equipment
|
—
|
|
(138
|
)
|
(10
|
)
|
—
|
|
(148
|
)
|
|||||||||
|
Proceeds from disposals of property, plant and equipment
|
—
|
|
2
|
|
—
|
|
—
|
|
2
|
|
|||||||||
|
Issuance of related party notes receivable
|
—
|
|
(673
|
)
|
(40
|
)
|
713
|
|
—
|
|
|||||||||
|
Repayment of related party notes receivable
|
—
|
|
500
|
|
—
|
|
(500
|
)
|
—
|
|
|||||||||
|
Net cash (used in) provided by investing activities
|
—
|
|
(309
|
)
|
(50
|
)
|
213
|
|
(146
|
)
|
|||||||||
|
Financing activities:
|
|
|
|
|
|
||||||||||||||
|
Proceeds from issuance of related party long-term debt
|
673
|
|
40
|
|
—
|
|
(713
|
)
|
—
|
|
|||||||||
|
Proceeds from issuance of senior unsecured notes
|
500
|
|
—
|
|
—
|
|
—
|
|
500
|
|
|||||||||
|
Repayment of related party long-term debt
|
(500
|
)
|
—
|
|
—
|
|
500
|
|
—
|
|
|||||||||
|
Repurchase of shares of common stock
|
(425
|
)
|
—
|
|
—
|
|
—
|
|
(425
|
)
|
|||||||||
|
Dividends paid
|
(183
|
)
|
—
|
|
—
|
|
—
|
|
(183
|
)
|
|||||||||
|
Proceeds from stock options exercised
|
12
|
|
—
|
|
—
|
|
—
|
|
12
|
|
|||||||||
|
Excess tax benefit on stock-based compensation
|
—
|
|
9
|
|
—
|
|
—
|
|
9
|
|
|||||||||
|
Deferred financing charges paid
|
(3
|
)
|
—
|
|
—
|
|
—
|
|
(3
|
)
|
|||||||||
|
Other, net
|
1
|
|
(3
|
)
|
—
|
|
—
|
|
(2
|
)
|
|||||||||
|
Net cash (used in) provided by financing activities
|
75
|
|
46
|
|
—
|
|
(213
|
)
|
(92
|
)
|
|||||||||
|
Cash and cash equivalents — net change from:
|
|
|
|
|
|
||||||||||||||
|
Operating, investing and financing activities
|
—
|
|
340
|
|
3
|
|
(1
|
)
|
342
|
|
|||||||||
|
Effect of exchange rate changes on cash and cash equivalents
|
—
|
|
(1
|
)
|
(6
|
)
|
1
|
|
(6
|
)
|
|||||||||
|
Cash and cash equivalents at beginning of period
|
—
|
|
252
|
|
63
|
|
—
|
|
315
|
|
|||||||||
|
Cash and cash equivalents at end of period
|
$
|
—
|
|
$
|
591
|
|
$
|
60
|
|
$
|
—
|
|
$
|
651
|
|
||||
34
|
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, 2011
.
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, 2011
. 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.
On October 1, 2012, Kraft Foods, Inc. spun-off its North American grocery business to its shareholders and changed its name to Mondelēz International, Inc. ("Mondelēz").
Overview
We are a leading integrated brand owner, manufacturer and distributor of non-alcoholic beverages in the United States ("U.S."), 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, Sunkist soda, 7UP, A&W, Canada Dry, Crush, Squirt, Peñafiel and Schweppes, 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 U.S. 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 and provides opportunities for net sales and profit growth through the alignment of the economic interests of our brand ownership and our manufacturing and distribution businesses through both our Direct Store Delivery ("DSD") system and our Warehouse Direct ("WD") delivery system. Our integrated business model enables us to be more flexible and responsive to the changing needs of our large retail customers and allows us to more fully leverage our scale and reduce costs by creating greater geographic manufacturing and distribution coverage.
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 business. In this segment we manufacture and sell beverage concentrates in the U.S. and Canada. Most of the brands in this segment are CSD brands. Key brands include Dr Pepper, Canada Dry, Crush, Schweppes, 7UP, Sunkist soda, A&W, Sun Drop, RC Cola, Diet Rite, Squirt, Welch's, Country Time, Vernors and the concentrate form of Hawaiian Punch.
Almost all of our beverage concentrates are manufactured at our plant in St. Louis, Missouri.
35
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 it in PET containers, glass bottles and aluminum cans, and sell it 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 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 U.S. and Canada.
Key NCB brands in this segment include Snapple, Hawaiian Punch, Mott's, Yoo-Hoo, Clamato, Deja Blue, AriZona, FIJI, Mistic, Nantucket Nectars, ReaLemon, Mr and Mrs T mixers, Rose's and Country Time. Key CSD brands in this segment include 7UP, Dr Pepper, A&W, Sunkist soda, Canada Dry, Squirt, RC Cola, Big Red, Sun Drop, Diet Rite, IBC and Vernors. Additionally, we distribute
third party brands such as Big Red, AriZona tea, FIJI mineral water, Neuro beverages, Vita Coco coconut water and Hydrive energy drinks. We also derive
a portion of our sales 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 U.S. and are sold or distributed to retailers and their warehouses by our own distribution network or by third party distributors. The raw materials used to manufacture our products include aluminum cans and ends, glass bottles, PET bottles and caps, paper products, sweeteners, juices, water and other ingredients.
We sell our Packaged Beverages' products both through our DSD system,
supported by a fleet of approximately 6,000 trucks and 12,000 employees, including sales representatives, merchandisers, drivers and warehouse workers, as well as through our
WD system,
both of which include the sales to all major retail channels, including supermarkets, fountain, mass merchandisers, club stores, vending machines, 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 bottlers and 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.
36
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
$1,528 million
for the
three months ended
September 30, 2012
, a decrease of
$1 million
from the
three months ended
September 30,
2011
.
|
|
•
|
Net income for the
three months ended
September 30, 2012
, was
$179 million
, compared to
$154 million
for the year ago period, an increase of
$25 million
, or approximately
16%
.
|
|
•
|
Diluted earnings per share were
$0.84
per share for the
three months ended
September 30, 2012
, compared with
$0.71
for the year ago period, an increase of $0.13, or approximately
18%
.
|
|
•
|
During the
three and nine months ended September 30, 2012
, we repurchased
2.5 million
and
6.3 million
shares, respectively, of our common stock valued at approximately
$110 million
and
$262 million
, respectively.
|
|
•
|
During the
third
quarter of
2012
, our Board of Directors (our "Board") declared a dividend of $0.34 per share, which was paid on October 5, 2012, to shareholders of record as of September 17, 2012.
|
Results of Operations
We eliminate from our financial results all intercompany transactions between entities included in our consolidated financial statements 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."
37
Three Months Ended
September 30, 2012
Compared to
Three Months Ended
September 30,
2011
Consolidated Operations
The following table sets forth our
unaudited consolidated
results of operations for the
three months ended
September 30, 2012
and
2011
(dollars in millions):
|
|
For the Three Months Ended September 30,
|
|
||||||||||||||
|
|
2012
|
2011
|
Percentage
|
|||||||||||||
|
|
Dollars
|
Percent
|
Dollars
|
Percent
|
Change
|
|||||||||||
|
Net sales
|
$
|
1,528
|
|
100.0
|
%
|
$
|
1,529
|
|
100.0
|
%
|
—
|
%
|
||||
|
Cost of sales
|
626
|
|
41.0
|
|
672
|
|
44.0
|
|
|
|
||||||
|
Gross profit
|
902
|
|
59.0
|
|
857
|
|
56.0
|
|
5
|
|
||||||
|
Selling, general and administrative expenses
|
561
|
|
36.7
|
|
559
|
|
36.6
|
|
|
|
||||||
|
Depreciation and amortization
|
29
|
|
1.9
|
|
31
|
|
2.0
|
|
|
|
||||||
|
Other operating expense (income), net
|
4
|
|
0.3
|
|
6
|
|
0.4
|
|
|
|
||||||
|
Income from operations
|
308
|
|
20.1
|
|
261
|
|
17.1
|
|
18
|
|
||||||
|
Interest expense
|
31
|
|
2.0
|
|
30
|
|
2.0
|
|
|
|
||||||
|
Interest income
|
—
|
|
—
|
|
(1
|
)
|
(0.1
|
)
|
||||||||
|
Other income, net
|
(4
|
)
|
(0.3
|
)
|
(4
|
)
|
(0.2
|
)
|
|
|
||||||
|
Income before provision for income taxes and equity in earnings of unconsolidated subsidiaries
|
281
|
|
18.4
|
|
236
|
|
15.4
|
|
19
|
|
||||||
|
Provision for income taxes
|
102
|
|
6.7
|
|
82
|
|
5.4
|
|
|
|
||||||
|
Income before equity in earnings of unconsolidated subsidiaries
|
179
|
|
11.7
|
|
154
|
|
10.1
|
|
|
|
||||||
|
Equity in earnings of unconsolidated subsidiaries, net of tax
|
—
|
|
—
|
|
—
|
|
—
|
|
||||||||
|
Net income
|
$
|
179
|
|
11.7
|
%
|
$
|
154
|
|
10.1
|
%
|
16
|
%
|
||||
|
Earnings per common share:
|
|
|
|
|
|
|||||||||||
|
Basic
|
$
|
0.85
|
|
NM
|
|
$
|
0.71
|
|
NM
|
|
20
|
%
|
||||
|
Diluted
|
0.84
|
|
NM
|
|
0.71
|
|
NM
|
|
18
|
%
|
||||||
Volume (BCS).
Volume (BCS) decreased
3%
for the
three months ended
September 30, 2012
, compared with the
three months ended
September 30,
2011
. In the U.S. and Canada, volume declined
3%
and in Mexico and the Caribbean, volume increased
1%
compared with the year ago period. CSD volume decreased
2%
, while NCB volume decreased
5%
. In CSDs, Dr Pepper volume decreased
1%
due to declines in base Dr Pepper partially offset by the growth of Dr Pepper TEN, which launched in the fourth quarter of 2011, and additional fountain availability. Our "Core 5" brands (7UP, Sunkist soda, A&W, Canada Dry and Sun Drop) were down
6%
on higher retail pricing and lower promotional activity compared to the year ago period as a result of high single-digit decreases in 7UP and Sunkist soda, a mid single-digit decrease in A&W and a double-digit decline in Sun Drop, partially offset by a mid single-digit increase in Canada Dry. Decreases in NCBs were driven by a
14%
decrease in Hawaiian Punch due to retail price increases and a
10%
decrease in Mott's due to lower promotional activity. These decreases were partially offset by an increase of
4%
in Snapple as a result of package and flavor innovation.
Net Sales.
Net sales decreased
$1 million
for the
three months ended
September 30, 2012
, compared with the
three months ended
September 30,
2011
. The decrease was attributable to lower branded sales volume and unfavorable volume mix across our segments, which were partially offset by price increases and favorable product mix.
Gross Profit
.
Gross profit increased
$45 million
, or approximately
5%
, for the
three months ended
September 30, 2012
, compared with the
three months ended
September 30,
2011
. Gross margin of
59.0%
for the
three months ended
September 30, 2012
, was higher than the
56.0%
gross margin for the
three months ended
September 30,
2011
. Significant factors resulting in the higher gross margin include $15 million of unrealized gains during the three months ended September 30, 2012 for the mark-to-market activity on commodity derivative contracts versus $9 million of unrealized losses for the three months ended September 30, 2011, increases in our net price realization and our ongoing productivity improvements.
38
Selling, General and Administrative Expenses.
SG&A expenses increased
$2 million
for the
three months ended
September 30, 2012
compared with the prior period. The increase was primarily the result of higher marketing investments and was partially offset by unrealized gains for the mark-to-market activity on our commodity derivative contracts and lower transportation costs.
Income from Operations.
Income from operations increased
$47 million
to
$308 million
for the
three months ended
September 30, 2012
, compared with the year ago period, driven primarily by the improvements in our gross profit.
Interest Expense, Interest Income and Other Income, Net.
Interest expense increased
$1 million
for the
three months ended
September 30, 2012
, compared with the year ago period, primarily due to higher interest rates associated with the senior notes that we issued during 2011. This increase was partially offset by a
1 million
benefit of hedge ineffectiveness with respect to derivative instruments designated as fair value hedges. Other income, net was
$4 million
for the
three months ended
September 30, 2012
, which related primarily to indemnity income associated with the Tax Sharing and Indemnification Agreement ("Tax Indemnity Agreement") with Mondelēz.
Provision for Income Taxes.
The effective tax rates for the
three months ended
September 30, 2012
and
2011
were
36.3%
and
34.7%
, respectively. The prior year effective tax rate included certain state and federal income tax benefits, primarily the domestic manufacturing deduction, related to the PepsiCo and Coca-Cola licensing agreements executed in 2010. The impact of these benefits decreased the provision for income taxes and the effective tax rate for the
three months ended
September 30,
2011
by
$5 million
and
2.1%
, respectively.
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, 2012
and
2011
, 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,
|
||||||
|
|
2012
|
2011
|
|||||
|
Segment Results — Net sales
|
|
|
|||||
|
Beverage Concentrates
|
$
|
303
|
|
$
|
292
|
|
|
|
Packaged Beverages
|
1,120
|
|
1,132
|
|
|||
|
Latin America Beverages
|
105
|
|
105
|
|
|||
|
Net sales
|
$
|
1,528
|
|
$
|
1,529
|
|
|
|
For the Three Months Ended September 30,
|
|||||||
|
2012
|
2011
|
||||||
|
Segment Results — SOP
|
|
|
|||||
|
Beverage Concentrates
|
$
|
198
|
|
$
|
196
|
|
|
|
Packaged Beverages
|
147
|
|
143
|
|
|||
|
Latin America Beverages
|
14
|
|
10
|
|
|||
|
Total SOP
|
359
|
|
349
|
|
|||
|
Unallocated corporate costs
|
47
|
|
82
|
|
|||
|
Other operating expense (income), net
|
4
|
|
6
|
|
|||
|
Income from operations
|
308
|
|
261
|
|
|||
|
Interest expense, net
|
31
|
|
29
|
|
|||
|
Other income, net
|
(4
|
)
|
(4
|
)
|
|||
|
Income before provision for income taxes and equity in earnings of unconsolidated subsidiaries
|
$
|
281
|
|
$
|
236
|
|
|
39
Beverage Concentrates
The following table details our Beverage Concentrates segment's net sales and SOP for the
three months ended
September 30, 2012
and
2011
(in millions):
|
|
For the Three Months Ended September 30,
|
||||||||||
|
|
2012
|
2011
|
Change
|
||||||||
|
Net sales
|
$
|
303
|
|
$
|
292
|
|
$
|
11
|
|
||
|
SOP
|
198
|
|
196
|
|
2
|
|
|||||
Net Sales.
Net sales increased
$11 million
, for the
three months ended
September 30, 2012
, compared with the
three months ended
September 30,
2011
. The increase was primarily due to an increase in concentrate prices, lower discounts and favorable mix, which were partially offset by a
2%
decline in concentrate case sales.
SOP.
SOP increased
$2 million
, for the
three months ended
September 30, 2012
, as compared with the year ago period. Drivers of the increase included the benefit of higher net sales, which were partially offset by $7 million of higher marketing investments and higher costs for sweeteners, flavors and other commodities.
Volume (BCS).
Volume (BCS) decreased
1%
for the
three months ended
September 30, 2012
, as compared with the year ago period. Our Core 5 brands decreased approximately 4% compared to the prior year as a result of a low double-digit decrease in Sunkist soda, a mid single-digit decrease in A&W, a low single-digit decrease in 7UP and a high single-digit decrease in Sun Drop, partially offset by a low single-digit increase in Canada Dry. The decrease in our Core 5 brands was partially offset by an 8% increase in Schweppes. Dr Pepper volume was flat.
Packaged Beverages
The following table details our Packaged Beverages segment's net sales and SOP for the
three months ended
September 30, 2012
and
2011
(in millions):
|
|
For the Three Months Ended September 30,
|
||||||||||
|
|
2012
|
2011
|
Change
|
||||||||
|
Net sales
|
$
|
1,120
|
|
$
|
1,132
|
|
$
|
(12
|
)
|
||
|
SOP
|
147
|
|
143
|
|
4
|
|
|||||
Volume.
Total sales volume
de
clined
6%
for the
three months ended
September 30, 2012
, compared with the
three months ended
September 30,
2011
. Lower CSD volumes, NCB volumes and contract manufacturing
de
creased our total segment sales volume by
3%
,
2%
and
1%
, respectively.
Within CSDs, volume
de
creased
7%
for the
three months ended
September 30, 2012
, compared with the
three months ended
September 30,
2011
. Volume for our Core 5 brands
de
creased
7%
, on higher retail pricing and lower promotional activity compared to the year ago period. The change in our Core 5 brands was led by a high single-digit decrease in 7UP, mid single-digit decreases in A&W and Sunkist soda and a double digit decrease in Sun Drop. These decreases were partially offset by a mid single-digit increase in Canada Dry. Dr Pepper volumes
de
creased
4%
for the
three months ended
September 30, 2012
, as declines in volume for base Dr Pepper were partially offset by growth of Dr Pepper TEN, which launched in the fourth quarter of 2011.
Within NCBs, volume
de
creased
6%
. Hawaiian Punch
de
clined
15%
as a result of retail price increases. Mott's
de
creased
10%
due to lower promotional activity. These decreases were partially offset by an
8%
increase in our water category, led by Vita Coco and Deja Blue, and a
1%
in
crease in Snapple due to package and flavor innovation.
Net Sales.
Net sales
de
creased
$12 million
for the
three months ended
September 30, 2012
, compared with the
three months ended
September 30,
2011
. Net sales decreased due to lower sales volumes, which were partially offset by favorable mix, net pricing increases for CSDs and Mott's and lower discounts.
40
SOP.
SOP
in
creased
$4 million
for the
three months ended
September 30, 2012
, compared with the
three months ended
September 30,
2011
. Factors driving the increase in SOP included the impact for our net pricing increases, favorable mix and ongoing productivity improvements. These factors were partially offset by lower sales volumes, higher labor and benefit costs and a LIFO charge as a result of the increase in the price of apples.
Latin America Beverages
The following table details our Latin America Beverages segment's net sales and SOP for the
three months ended
September 30, 2012
and
2011
(in millions):
|
|
For the Three Months Ended September 30,
|
||||||||||
|
|
2012
|
2011
|
Change
|
||||||||
|
Net sales
|
$
|
105
|
|
$
|
105
|
|
$
|
—
|
|
||
|
SOP
|
14
|
|
10
|
|
4
|
|
|||||
Volume.
Sales volume
in
creased
1%
for the
three months ended
September 30, 2012
, as compared with the
three months ended
September 30,
2011
. The
in
crease in volume was driven by a
5%
in
crease in Peñafiel as a result of package innovations and a
12%
in
crease in Crush. These increases in sales volume were partially offset by a
3%
de
crease in Squirt due to lower sales to third party bottlers and a
6%
de
crease in Aguafiel as a result of lower promotional activity in the current period.
Net Sales.
Net sales were flat for the
three months ended
September 30, 2012
, compared with the
three months ended
September 30,
2011
. Net sales increased due to favorable product mix, price increases and increased sales volumes, offset by
$6 million
of unfavorable foreign currency translation.
SOP.
SOP
in
creased
$4 million
, or
40%
, for the
three months ended
September 30, 2012
, compared with the
three months ended
September 30,
2011
, primarily due to the impact of the favorable product mix and price increases. These increases were partially offset by unfavorable foreign currency effects of
$4 million
.
41
Nine Months Ended
September 30, 2012
Compared to
Nine Months Ended
September 30,
2011
Consolidated Operations
The following table sets forth our
unaudited consolidated
results of operations for the
nine months ended September 30, 2012, and 2011
(dollars in millions):
|
|
For the Nine Months Ended September 30,
|
|
||||||||||||||
|
|
2012
|
2011
|
Percentage
|
|||||||||||||
|
|
Dollars
|
Percent
|
Dollars
|
Percent
|
Change
|
|||||||||||
|
Net sales
|
$
|
4,511
|
|
100.0
|
%
|
$
|
4,442
|
|
100.0
|
%
|
2
|
%
|
||||
|
Cost of sales
|
1,895
|
|
42.0
|
|
1,881
|
|
42.3
|
|
||||||||
|
Gross profit
|
2,616
|
|
58.0
|
|
2,561
|
|
57.7
|
|
2
|
|
||||||
|
Selling, general and administrative expenses
|
1,713
|
|
38.0
|
|
1,704
|
|
38.4
|
|
||||||||
|
Depreciation and amortization
|
95
|
|
2.1
|
|
95
|
|
2.1
|
|
||||||||
|
Other operating expense (income), net
|
8
|
|
0.2
|
|
9
|
|
0.2
|
|
||||||||
|
Income from operations
|
800
|
|
17.7
|
|
753
|
|
17.0
|
|
6
|
|
||||||
|
Interest expense
|
94
|
|
2.1
|
|
85
|
|
1.9
|
|
||||||||
|
Interest income
|
(1
|
)
|
—
|
|
(2
|
)
|
—
|
|
||||||||
|
Other income, net
|
(8
|
)
|
(0.2
|
)
|
(9
|
)
|
(0.2
|
)
|
||||||||
|
Income before provision for income taxes and equity in earnings of unconsolidated subsidiaries
|
715
|
|
15.8
|
|
679
|
|
15.3
|
|
5
|
|
||||||
|
Provision for income taxes
|
256
|
|
5.7
|
|
240
|
|
5.5
|
|
||||||||
|
Income before equity in earnings of unconsolidated subsidiaries
|
459
|
|
10.1
|
|
439
|
|
9.9
|
|
||||||||
|
Equity in earnings of unconsolidated subsidiaries, net of tax
|
—
|
|
—
|
|
1
|
|
—
|
|
||||||||
|
Net income
|
$
|
459
|
|
10.1
|
%
|
$
|
440
|
|
9.9
|
%
|
4
|
%
|
||||
|
Earnings per common share:
|
|
|
|
|
|
|||||||||||
|
Basic
|
$
|
2.17
|
|
NM
|
|
$
|
2.00
|
|
NM
|
|
9
|
%
|
||||
|
Diluted
|
$
|
2.15
|
|
NM
|
|
$
|
1.97
|
|
NM
|
|
9
|
%
|
||||
Volume (BCS).
Volume (BCS) decreased
1%
for the
nine months ended
September 30, 2012
, compared with the
nine months ended
September 30,
2011
. In the U.S. and Canada, volume declined
2%
and in Mexico and the Caribbean, volume increased
1%
compared with the year ago period. CSD volume was
flat
, while NCB volume decreased
6%
. In CSDs, Dr Pepper volume increased
1%
due to the growth of Dr Pepper TEN, which launched in the fourth quarter of 2011, and the impact of additional fountain availability. These increases were partially offset by declines in base Dr Pepper. Our Core 5 brands were down
1%
compared to the year ago period as a result of a double-digit decrease in Sun Drop due to cycling the national launch of the brand in the prior year, a mid single-digit decrease in 7UP and a low single-digit decrease in Sunkist soda. These decreases were partially offset by a mid single-digit increase in Canada Dry. Schweppes grew
7%
reflecting growth in the ginger ale category, while Crush decreased
4%
. Our other CSD brands decreased 3% for the
nine months ended
September 30, 2012
. Decreases in NCBs were driven by a
19%
decrease in Hawaiian Punch as a result of price increases and a
10%
decrease in Mott's due to net price increases and lower promotional activity. These decreases were partially offset by a
3%
increase in Snapple as a result of package and flavor innovation.
Net Sales.
Net sales increased
$69 million
, or approximately
2%
for the
nine months ended
September 30, 2012
, compared with the
nine months ended
September 30,
2011
. The increase was attributable to price increases, favorable mix and lower discounts. These drivers were partially offset by lower branded sales volumes and the unfavorable impact of foreign currency.
42
Gross Profit
.
Gross profit increased
$55 million
, or approximately
2%
, for the
nine months ended
September 30, 2012
, compared with the
nine months ended
September 30,
2011
. Gross margin of
58.0%
for the
nine months ended
September 30, 2012
, was higher than the
57.7%
gross margin for the
nine months ended
September 30,
2011
. Significant factors causing the increase in gross margin were increases in our net price realization and $15 million of unrealized gains during the nine months ended September 30, 2012 for the mark-to-market activity on commodity derivative contracts versus $14 million of unrealized losses for the nine months ended September 30, 2011, which were partially offset by higher costs for packaging materials, flavors, apple juice concentrate, sweeteners and other commodities.
Selling, General and Administrative Expenses.
As a percentage of net sales, SG&A expenses improved to
38.0%
for the
nine months ended
September 30, 2012
, compared to
38.4%
in the prior year, SG&A expenses increased
$9 million
for the
nine months ended
September 30, 2012
compared with the prior period. The increase was the result of an increase in marketing investments and higher labor and benefit costs. These increases were partially offset by lower transportation costs and the favorable impact of foreign currency on our SG&A expenses. The lower transportation costs were the result of the reclassification of $14 million for certain transportation allowances to our customers from SG&A expenses to net sales, lower distribution fees as a result of lower NCB volumes from our Packaged Beverages segment and ongoing productivity improvements.
Income from Operations.
Income from operations increased
$47 million
to
$800 million
for the
nine months ended
September 30, 2012
, principally due to the benefit of higher net sales.
Interest Expense, Interest Income and Other Income, Net.
Interest expense increased
$9 million
for the
nine months ended
September 30, 2012
, compared with the year ago period primarily due to higher interest rates associated with the senior notes that we issued during 2011. Other income, net was
$8 million
for the
nine months ended
September 30, 2012
, which related primarily to indemnity income associated with the Tax Indemnity Agreement with Mondelēz.
Provision for Income Taxes.
The effective tax rates for the
nine months ended
September 30, 2012
and
2011
were
35.8%
and
35.3%
, respectively. The prior year effective tax rate included certain state and federal income tax benefits, primarily the domestic manufacturing deduction, related to the PepsiCo and Coca-Cola licensing agreements executed in 2010. The impact of these benefits decreased the provision for income taxes and the effective tax rate for the
nine months ended
September 30,
2011
by
$14 million
and
2.1%
, respectively.
43
Results of Operations by Segment
The following tables set forth net sales and SOP for our segments for the
nine months ended September 30, 2012, and 2011
, 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 U.S. GAAP (in millions):
|
|
For the Nine Months Ended September 30,
|
||||||
|
|
2012
|
2011
|
|||||
|
Segment Results — Net sales
|
|
|
|||||
|
Beverage Concentrates
|
$
|
888
|
|
$
|
868
|
|
|
|
Packaged Beverages
|
3,314
|
|
3,252
|
|
|||
|
Latin America Beverages
|
309
|
|
322
|
|
|||
|
Net sales
|
$
|
4,511
|
|
$
|
4,442
|
|
|
|
For the Nine Months Ended September 30,
|
|||||||
|
2012
|
2011
|
||||||
|
Segment Results — SOP
|
|
|
|||||
|
Beverage Concentrates
|
$
|
552
|
|
$
|
567
|
|
|
|
Packaged Beverages
|
408
|
|
391
|
|
|||
|
Latin America Beverages
|
37
|
|
34
|
|
|||
|
Total SOP
|
997
|
|
992
|
|
|||
|
Unallocated corporate costs
|
189
|
|
230
|
|
|||
|
Other operating expense (income), net
|
8
|
|
9
|
|
|||
|
Income from operations
|
800
|
|
753
|
|
|||
|
Interest expense, net
|
93
|
|
83
|
|
|||
|
Other income, net
|
(8
|
)
|
(9
|
)
|
|||
|
Income before provision for income taxes and equity in earnings of unconsolidated subsidiaries
|
$
|
715
|
|
$
|
679
|
|
|
Beverage Concentrates
The following table details our Beverage Concentrates segment's net sales and SOP for the
nine months ended September 30, 2012, and 2011
(in millions):
|
|
For the Nine Months Ended September 30,
|
||||||||||
|
|
2012
|
2011
|
Change
|
||||||||
|
Net sales
|
$
|
888
|
|
$
|
868
|
|
$
|
20
|
|
||
|
SOP
|
552
|
|
567
|
|
(15
|
)
|
|||||
Net Sales.
Net sales increased
$20 million
, for the
nine months ended
September 30, 2012
, compared with the
nine months ended
September 30,
2011
. The increase was primarily due to an increase in concentrate prices, lower discounts and favorable mix, which were partially offset by a
2%
decline in concentrate case sales.
SOP.
SOP decreased
$15 million
, or approximately
3%
, for the
nine months ended
September 30, 2012
, as compared with the year ago period. Drivers of the decrease included $25 million of higher marketing investments and higher costs for flavors, sweeteners and other commodities. The decrease was partially offset by the benefit of higher net sales.
44
Volume (BCS).
Volume (BCS) decreased
1%
for the
nine months ended
September 30, 2012
, as compared with the year ago period. Our Core 5 brands decreased approximately 3% compared to the prior year as a result of a low double digit decline in Sunkist soda, a high single-digit decrease in Sun Drop and low single-digit decreases in 7UP and A&W, partially offset by a low single-digit increase in Canada Dry. Crush had a mid single-digit decline. Dr Pepper volume increased 1% due to the growth from the launch of Dr Pepper TEN, which occurred in the fourth quarter of 2011, and the impact of additional fountain availability.
Packaged Beverages
The following table details our Packaged Beverages segment's net sales and SOP for the
nine months ended September 30, 2012, and 2011
(in millions):
|
|
For the Nine Months Ended September 30,
|
||||||||||
|
|
2012
|
2011
|
Change
|
||||||||
|
Net sales
|
$
|
3,314
|
|
$
|
3,252
|
|
$
|
62
|
|
||
|
SOP
|
408
|
|
391
|
|
17
|
|
|||||
Volume.
Total sales volume
de
creased
2%
for the
nine months ended
September 30, 2012
, compared with the
nine months ended
September 30,
2011
, driven primarily by lower NCB volumes.
Within CSDs, volume was
flat
for the
nine months ended
September 30, 2012
, compared with the
nine months ended
September 30,
2011
. Volume for our Core 5 brands
in
creased
1%
led by a high single-digit increase in Canada Dry, mid single-digit increase in Sunkist soda, as a result of the launch of our new Strawberry and Grape flavors, and a low single-digit increase in A&W. Sun Drop experienced a double-digit decrease primarily due to cycling the national launch of the brand in the prior year during the first six months of 2012, while 7UP had a mid single-digit decrease. Dr Pepper volumes were
flat
for the
nine months ended
September 30, 2012
, as growth of Dr Pepper TEN, which launched in the fourth quarter of 2011, was offset by decreased volume in base Dr Pepper.
Within NCBs, volume
de
creased
6%
. Hawaiian Punch
de
clined
20%
as a result of price increases, while Mott's
de
creased
10%
as a result of net pricing increases and lower promotional activity. These decreases were partially offset by a
14%
in
crease in our water category, led by Vita Coco and FIJI, and a
2%
in
crease in Snapple due to package and flavor innovation.
Net Sales.
Net sales
in
creased
$62 million
for the
nine months ended
September 30, 2012
, compared with the
nine months ended
September 30,
2011
. Net sales increased due to favorable mix, net pricing increases for CSDs, Hawaiian Punch and Mott's, and lower discounts. These increases were partially offset by a decrease in our NCB sales volumes.
SOP.
SOP
in
creased
$17 million
for the
nine months ended
September 30, 2012
, compared with the
nine months ended
September 30,
2011
. Significant factors resulting in such increase included the benefit of higher net sales and lower distribution fees, which were primarily a result of lower NCB volumes. These factors were partially offset by higher costs for our commodities, which occurred mainly during the first six months of 2012, and higher labor and benefit costs.
45
Latin America Beverages
The following table details our Latin America Beverages segment's net sales and SOP for the
nine months ended September 30, 2012, and 2011
(in millions):
|
|
For the Nine Months Ended September 30,
|
||||||||||
|
|
2012
|
2011
|
Change
|
||||||||
|
Net sales
|
$
|
309
|
|
$
|
322
|
|
$
|
(13
|
)
|
||
|
SOP
|
37
|
|
34
|
|
3
|
|
|||||
Volume.
Sales volume
in
creased
1%
for the
nine months ended
September 30, 2012
, as compared with the
nine months ended
September 30,
2011
. The
in
crease in volume was driven by a
4%
increase in Peñafiel as a result of package innovations, a
15%
in
crease in Clamato, a
9%
in
crease in Crush and a double-digit increase in Dr Pepper. These increases in sales volume were partially offset by a
13%
de
crease in Aguafiel as a result of lower promotional activity.
Net Sales.
Net sales
de
creased
$13 million
, or
4%
, for the
nine months ended
September 30, 2012
, compared with the
nine months ended
September 30,
2011
. Net sales decreased as a result of
$26 million
of unfavorable foreign currency translation and a
$7 million
reclassification for certain transportation allowances to our customers from SG&A expenses to net sales. These decreases were partially offset by favorable product mix, price increases and increased sales volumes.
SOP.
SOP
in
creased
$3 million
, or approximately
9%
, for the
nine months ended
September 30, 2012
, compared with the
nine months ended
September 30,
2011
, primarily due to the impact of favorable product mix and price increases. These increases were partially offset by approximately
$10 million
of unfavorable foreign currency effects and higher logistics costs.
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 estimates as critical accounting estimates:
|
•
|
revenue recognition;
|
|
•
|
customer marketing programs and incentives;
|
|
•
|
goodwill and other indefinite-lived intangible assets;
|
|
•
|
pension and post-retirement benefits;
|
|
•
|
risk management programs; and
|
|
•
|
income taxes.
|
These critical accounting estimates are discussed in greater detail in our Annual Report on Form 10-K for the year ended
December 31, 2011
.
46
Liquidity and Capital Resources
Trends and Uncertainties Affecting Liquidity
Customer and consumer demand for the Company's products may be impacted by recession or other economic downturn in the U.S., Canada, Mexico or the Caribbean, which could result in a reduction in our sales volume. Similarly, disruptions in financial and credit markets may impact the Company's ability to manage normal commercial relationships with its customers, suppliers and creditors. These disruptions could have a negative impact on the ability of our customers to timely pay their obligations to us, thus reducing our cash flow, or the ability of our vendors to timely supply materials.
We believe that the following trends and uncertainties may also impact liquidity:
|
•
|
changes in economic factors could impact consumers' purchasing power;
|
|
•
|
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;
|
|
•
|
continued payment of dividends;
|
|
•
|
seasonality of our operating cash flows could impact short-term liquidity;
|
|
•
|
continued repurchases of our outstanding common stock;
|
|
•
|
our ability to issue unsecured commercial paper notes (the "Commercial Paper") on a private placement basis up to a maximum aggregate amount outstanding at any time of
$500 million
; and
|
|
•
|
our ability to refinance
$450 million
of our outstanding
2.35%
senior notes due December 21, 2012 ("2012 Notes") or
$250 million
of our outstanding
6.12%
senior notes due May 1, 2013. We intend to refinance the 2012 Notes during the fourth quarter of 2012.
|
Financing Arrangements
The following descriptions represent our available financing arrangements as of
September 30, 2012
. As of
September 30, 2012
, we were in compliance with all covenant requirements for our senior unsecured notes and the unsecured credit agreement.
Unsecured Credit Agreement
On September 25, 2012, the Company entered into a new five-year unsecured credit agreement (the "Credit Agreement"), which provides for a
$500 million
revolving line of credit (the "Revolver"). Borrowings under the Revolver bear interest at a floating rate per annum based upon the alternate base rate ("ABR") or the Eurodollar rate, in each case plus an applicable margin which varies based upon the Company's debt ratings. Rates range from
0.000%
to
0.300%
for ABR loans and from
0.795%
to
1.300%
for Eurodollar loans. The ABR is defined as the greater of (a) JPMorgan Chase Bank's prime rate, (b) the federal funds effective rate plus
0.500%
and (c) the adjusted LIBOR for a one month interest period. The adjusted LIBOR is the London interbank offered rate for dollars adjusted for a statutory reserve rate set by the Board of Governors of the U.S. Federal Reserve System.
Additionally, the Revolver is available for the issuance of letters of credit and swingline advances not to exceed
$75 million
and
$50 million
, respectively. Swingline advances will accrue interest at a rate equal to the ABR plus the applicable margin.
The following table provides amounts utilized and available for the Revolver and each sublimit arrangement type as of
September 30, 2012
(in millions):
|
Amount Utilized
|
Balances Available
|
||||||
|
Revolver
|
$
|
—
|
|
$
|
493
|
|
|
|
Letters of credit
|
7
|
|
68
|
|
|||
|
Swingline advances
|
—
|
|
50
|
|
|||
The Credit Agreement further provides that the Company may request at any time, subject to the satisfaction of certain conditions, that the aggregate commitments under the facility be increased by a total amount not to exceed
$250 million
.
47
The Credit Agreement’s representations, warranties, covenants and events of default are generally customary for investment grade credit and includes a covenant that requires the Company to maintain a ratio of consolidated total debt (as defined in the Credit Agreement) to annualized consolidated EBITDA (as defined in the Credit Agreement) of no more than 3.00 to 1.00, tested quarterly. Upon the occurrence of an event of default, among other things, amounts outstanding under the Credit Agreement may be accelerated and the commitments may be terminated. The Company’s obligations under the Credit Agreement are guaranteed by certain of the Company’s direct and indirect domestic subsidiaries on the terms set forth in the Credit Agreement. The Credit Agreement has a maturity date of September 25, 2017; however, the Company, with the consent of lenders holding more than 50% of the total commitments under the Credit Agreement and subject to the satisfaction of certain conditions, may extend the maturity date for up to two additional one-year terms.
A
n unused commitment fee is payable quarterly to the lenders on the unused portion of the commitments of the Revolver equal to
0.08%
to
0.20%
per annum, depending upon the Company's debt ratings.
There were no significant unused commitment fees incurred during the three and nine months ended September 30, 2012.
Commercial Paper Program
On December 10, 2010, we entered into a commercial paper program under which we may issue Commercial Paper on a private placement basis up to a maximum aggregate amount outstanding at any time of
$500 million
. The maturities of the Commercial Paper will vary, but may not exceed 364 days from the date of issue. We may issue Commercial Paper from time to time for general corporate purposes, and the program is supported by the Revolver. Outstanding Commercial Paper reduces the amount of borrowing capacity available under the Revolver and outstanding amounts under the Revolver reduce the Commercial Paper availability. As of
September 30, 2012
and
December 31, 2011
, we had no outstanding Commercial Paper.
Shelf Registration Statement
On November 20, 2009, our Board authorized us to issue up to
$1,500 million
of securities. Subsequently, we filed a "well-known seasoned issuer" shelf registration statement with the Securities and Exchange Commission, effective December 14, 2009, which registers an indeterminable amount of debt securities for future sales. We
issued senior unsecured notes of
$850 million
on December 21, 2009 and
$500 million
on January 11, 2011.
On May 18, 2011, our Board authorized the issuance of up to an additional
$1,350 million
of debt securities. On November 15, 2011, we issued senior unsecured notes of $
500 million
.
As a result,
$1,000 million
is available for future issuance. The shelf registration statement expires December 14, 2012.
Letters of Credit Facilities
The Company currently has letter of credit facilities available in addition to the portion of the Revolver reserved for issuance of letters of credit. Under these letter of credit facilities,
$130 million
is available for the issuance of letters of credit,
$55 million
of which was utilized as of
September 30, 2012
. The balance available for additional letters of credit was
$75 million
as of
September 30, 2012
.
As of
September 30, 2012
, our debt ratings were Baa1 with a stable outlook from Moody's and BBB with a stable outlook from Standard & Poor's ("S&P"). Our commercial paper ratings were P-2/A-2 from Moody's and S&P.
These debt and commercial paper ratings impact the interest we pay on our financing arrangements. A downgrade of one or both of our debt and commercial paper ratings could increase our interest expense and decrease the cash available to fund anticipated obligations.
Cash Management
We fund our liquidity needs from cash flow from operations, cash on hand or amounts available under our financing arrangements, if necessary.
Capital Expenditures
Cash paid for capital expenditures was
$143 million
for the
nine months ended
September 30, 2012
. Capital expenditures primarily related to machinery and equipment, plant improvements, expansion and replacement of existing cold drink equipment and our distribution fleet and IT investments. In 2012, we expect to incur annual capital expenditures, net of proceeds from disposals, in an amount equal to approximately 3.75% of our net sales, which we expect to fund through cash provided by operating activities.
48
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. 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 financing arrangements, if necessary.
The following table summarizes our cash activity for the
nine months ended September 30, 2012, and 2011
(in millions):
|
|
For the Nine Months Ended September 30,
|
||||||
|
|
2012
|
2011
|
|||||
|
Net cash provided by operating activities
|
$
|
264
|
|
$
|
580
|
|
|
|
Net cash used in investing activities
|
(144
|
)
|
(146
|
)
|
|||
|
Net cash used in financing activities
|
(442
|
)
|
(92
|
)
|
|||
Net Cash Provided By Operating Activities
Net cash provided by operating activities decreased $316 million for the
nine months ended
September 30, 2012
as compared to the
nine months ended
September 30, 2011
, primarily due to the tax payments of
$531 million
resulting from the licensing agreements with PepsiCo and Coca-Cola. The tax payments were partially offset by favorability in our working capital. Accounts payable improved $31 million in 2012 as a result of timing of payments. Trade accounts receivable improved $54 million driven primarily by lower net sales in the third quarter of 2012. Inventories improved $26 million largely due to ongoing productivity improvements.
Net Cash Used in Investing Activities
Cash used in investing activities for the
nine months ended September 30, 2012, and 2011
consisted primarily of capital expenditures of
$143 million
and
$148 million
, respectively.
Net Cash Used in Financing Activities
Cash used in financing activities for the
nine months ended
September 30, 2012
, consisted of stock repurchases of
$262 million
and dividend payments of
$213 million
. For the
nine months ended
September 30, 2011
, cash used in financing activities consisted of stock repurchases of
$425 million
and dividend payments of
$183 million
, partially offset by
$500 million
of proceeds from the issuance of the Notes due in January 2016.
Cash and Cash Equivalents
As a result of the above items, cash and cash equivalents
de
creased
$318 million
since
December 31, 2011
to
$383 million
as of
September 30, 2012
.
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
23%
of our total cash position as of
September 30, 2012
.
Dividends
Our Board declared dividends of
$1.02
,
$1.21
and
$0.90
per share on outstanding common stock during the
nine months ended
September 30, 2012
and the years ended
December 31, 2011
and
2010
, respectively.
49
Common Stock Repurchases
During 2010 and 2011, our Board authorized the repurchase of up to
$2,000 million
of the Company's outstanding common stock. For the
nine months ended September 30, 2012, and 2011
, the Company repurchased and retired
6.3 million
and
11.1 million
shares of common stock, respectively, valued at approximately
$262 million
and
$425 million
, respectively. Refer to Part II, Item 2 of this Quarterly Report on Form 10-Q for additional information regarding these repurchases.
Contractual Commitments and Obligations
We enter into various contractual obligations that impact, or could impact, our liquidity. 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 or amounts available under our financing arrangements, if necessary.
The following summarizes our contractual obligations and contingencies as of
September 30, 2012
(in millions):
|
|
|
Payments Due in Year
|
|||||||||||||||||||||||||
|
|
Total
|
2012
|
2013
|
2014
|
2015
|
2016
|
After 2016
|
||||||||||||||||||||
|
Capital leases
(1)
|
$
|
215
|
|
$
|
2
|
|
$
|
11
|
|
$
|
11
|
|
$
|
11
|
|
$
|
11
|
|
$
|
169
|
|
||||||
|
Operating leases
(2)
|
$
|
264
|
|
$
|
13
|
|
$
|
56
|
|
$
|
47
|
|
$
|
38
|
|
$
|
29
|
|
$
|
81
|
|
||||||
|
Purchase obligations
(3)
|
$
|
674
|
|
$
|
246
|
|
$
|
294
|
|
$
|
80
|
|
$
|
24
|
|
$
|
13
|
|
$
|
17
|
|
||||||
|
Interest payments
(4)
|
$
|
922
|
|
$
|
44
|
|
$
|
97
|
|
$
|
90
|
|
$
|
90
|
|
$
|
85
|
|
$
|
516
|
|
||||||
|
Total
|
$
|
2,075
|
|
$
|
305
|
|
$
|
458
|
|
$
|
228
|
|
$
|
163
|
|
$
|
138
|
|
$
|
783
|
|
||||||
____________________________
|
(1)
|
Amounts represent our contractual payment obligations for our lease arrangements classified as a capital lease.
|
|
(2)
|
Amounts represent minimum rental commitment under non-cancelable operating leases.
|
|
(3)
|
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.
|
|
(4)
|
Amounts represent our estimated interest payments based on specified interest rates for fixed rate debt and debt amortization schedules.
|
Through
September 30, 2012
, 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, 2011
.
Off-Balance Sheet Arrangements
We participate in four multiemployer pension plans. We recognized an expense of
$1 million
and
$4 million
, respectively, related to contributions to the four multiemployer pension plans for the
three and nine months ended September 30, 2012
. In the event that we or, in the case of one multiemployer pension plan, another large employer withdraws from participation in one of these plans, then applicable law could require us to make an additional lump-sum contribution to the plan, and we would have to reflect that as an expense in our consolidated statements of income and as a liability on our condensed consolidated balance sheets. We presently have no intention of withdrawing from any of these multiemployer pension plans.
There are no other off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our results of operations, financial condition, liquidity, capital expenditures or capital resources other than letters of credit outstanding. Refer to Note 5 of the Notes to our
Unaudited Condensed Consolidated
Financial Statements for additional information regarding outstanding letters of credit.
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.
50
|
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 U.S. 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, 2012
, 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
$21 million
on an annual basis.
We use derivative instruments such as foreign exchange forward contracts to manage a portion of our exposure to changes in foreign exchange rates. For the period ending
September 30, 2012
, we had derivative contracts outstanding with a notional value of
$101 million
maturing at various dates through December 15, 2014.
Interest Rate Risk
We centrally manage our debt portfolio through the use of interest rate swaps and monitor our mix of fixed-rate and variable rate debt. At
September 30, 2012
, the carrying value of our debt, excluding capital leases, was
$2,710 million
, $350 million of which is designated as fair value hedges and exposed to variability in interest rates.
The following table is an estimate of the impact to the fair value hedges that could result from hypothetical interest rate changes during the term of the financial instruments, based on debt levels as of
September 30, 2012
:
|
Sensitivity Analysis
|
|||||||||
|
Change in Fair Value
|
|||||||||
|
Hypothetical Change in Interest Rates
|
Annual Impact to Interest Expense
|
Other Current and Non-current Assets
|
Other Non-current Liabilities
|
Total Debt
|
|||||
|
1-percent decrease
(1)
|
$1 million decrease
|
$40 million increase
|
—
|
|
$40 million increase
|
||||
|
1-percent increase
|
$4 million increase
|
$27 million decrease
|
$9 million increase
|
|
$36 million decrease
|
||||
____________________________
(1) We pay an average floating rate, which fluctuates periodically, based on LIBOR and a credit spread, as a result of designated fair value hedges on certain debt instruments. See Note 6 of the Notes to our
Unaudited Condensed Consolidated
Financial Statements for further information. Our weighted average LIBOR rate as of
September 30, 2012
was 0.55%. As LIBOR has not historically fallen below 0.25%, our estimate of the annual impact to interest expense reflects this assumption if our hypothetical change in the interest rate fell below the historical threshold.
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 PET, diesel fuel, corn (for high fructose corn syrup), aluminum, sucrose, apple juice concentrate and natural gas (for use in processing and packaging).
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, 2012
, was a net
asset
of
$5 million
.
As of
September 30, 2012
, 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.
51
|
Item 4.
|
Controls and Procedures.
|
Based on an 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, 2012
, 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.
52
|
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, 2011
.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
We repurchased approximately
2.5 million
shares of our common stock valued at approximately
$110 million
in the
third
quarter of
2012
. Our share repurchase activity, on a monthly basis, for the quarter ended
September 30, 2012
was as follows (in thousands, except per share data):
|
Period
|
Number of Shares Purchased
|
Average Price Paid per Share
|
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
(1)
|
Maximum Dollar Value of Shares that May Yet be Purchased Under Publicly Announced Plans or Programs
|
||||||||||
|
July 1, 2012 – July 31, 2012
|
—
|
|
$
|
—
|
|
—
|
|
$
|
1,220,009
|
|
||||
|
August 1, 2012 – August 31, 2012
|
312
|
|
45.00
|
|
312
|
|
1,205,976
|
|
||||||
|
September 1, 2012 – September 30, 2012
|
2,158
|
|
44.32
|
|
2,158
|
|
1,110,350
|
|
||||||
|
For the quarter ended September 30, 2012
|
2,470
|
|
44.41
|
|
2,470
|
|
|
|||||||
____________________________
|
(1)
|
As previously announced, on July 12, 2010, our Board authorized the repurchase of $1,000 million of the Company's outstanding common stock over the next three years. On November 17, 2011, our Board authorized the repurchase of an additional $1,000 million of the Company's outstanding common stock. This column discloses the number of shares purchased pursuant to these programs during the indicated time periods.
|
53
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
|
Certificate of Amendment to Amended and Restated Certificate of Incorporation of Dr Pepper Snapple Group, Inc. effective as of May 17, 2012 (filed as Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q (filed July 26, 2012) and incorporated herein by reference).
|
|
3.3
|
Amended and Restated By-Laws of Dr Pepper Snapple Group, Inc. effective as of May 17, 2012 (filed as Exhibit 3.3 to the Company's Quarterly Report on Form 10-Q (filed July 26, 2012) 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 2018 (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).
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4.4
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Form of 7.45% Senior Notes due 2038 (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).
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4.5
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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).
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4.6
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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).
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4.7
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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).
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4.8
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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).
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4.9
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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).
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4.10
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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).
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4.11
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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).
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4.12
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2.35% Senior Notes due 2012 (in global form), dated December 21, 2009, in the principal amount of $450 million(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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4.13
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Second Supplemental Indenture, dated as of January 11, 2011, among Dr Pepper Snapple Group, Inc., the guarantors party thereto 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 January 11, 2011) and incorporated herein by reference).
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4.14
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2.90% Senior Note due 2016 (in global form), dated January 11, 2011, in the principal amount of $500 million (filed as Exhibit 4.2 to the Company's Current Report on Form 8-K (filed on January 11, 2011) and incorporated herein by reference).
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4.15
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Third Supplemental Indenture, dated as of November 15, 2011, among Dr Pepper Snapple Group, Inc., the guarantors party thereto 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 November 15, 2011) and incorporated herein by reference).
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54
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4.16
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2.60% Senior Note due 2019 (in global form), dated November 15, 2011, in the principal amount of $250 million (filed as Exhibit 4.2 to the Company's Current Report on Form 8-K (filed on November 15, 2011) and incorporated herein by reference).
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4.17
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3.20% Senior Note due 2021 (in global form), dated November 15, 2011, in the principal amount of $250 million (filed as Exhibit 4.3 to the Company's Current Report on Form 8-K (filed on November 15, 2011) and incorporated herein by reference).
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10.1
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Credit Agreement, dated as of September 25, 2012, among the Company, the Lenders and Issuing Banks party thereto; JPMorgan Chase Bank, N.A., as Administrative Agent; Bank of America, N.A. and Deutsche Bank Securities Inc., as Syndication Agents, and Branch Banking and Trust Company, Credit Suisse AG, Cayman Islands Branch, HSBC Bank USA, N.A., Morgan Senior Funding, Inc., UBS Securities LLC and U.S. Bank National Association, as Co-Documentation Agents (filed as Exhibit 10.1 to the Company's Current Report on Form 8-K (filed on September 26, 2012) and incorporated herein by reference).
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12.1*
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Computation of Ratio of Earnings to Fixed Charges.
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31.1*
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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.
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31.2*
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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.
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32.1**
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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.
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32.2**
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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.
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101*
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The following financial information from Dr Pepper Snapple Group, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Statements of Income for the three and six months ended June 30, 2012 and 2011, (ii) Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2012 and 2011, (iii) Condensed Consolidated Balance Sheets as of June 30, 2012 and December 31, 2011, (iv) Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and 2011, and (v) the Notes to Condensed Consolidated Financial Statements.
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* Filed herewith.
** Furnished herewith.
55
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.
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Dr Pepper Snapple Group, Inc.
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By:
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/s/ Martin M. Ellen
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Name:
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Martin M. Ellen
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Title:
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Executive Vice President and Chief Financial
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Officer of Dr Pepper Snapple Group, Inc.
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Date: October 24, 2012
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56
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