• Increased health consciousness. We believe the main beneficiaries of this trend include diet and low calorie drinks, ready-to-drink teas and bottled waters.

• Changes in lifestyle. We believe changes in lifestyle will continue to drive increased sales of single-serve beverages, which typically have higher margins.

• Growing demographic segments in the U.S. We believe marketing and product innovations that target fast growing population segments, such as the Hispanic community in the U.S., will drive further market growth.

• Product and packaging innovation. We believe brand owners and bottling companies will continue to create new products and packages, such as beverages with new ingredients and new premium flavors, and innovative convenient packaging that address changes in consumer tastes and preferences.

• Changing retailer landscape. As retailers continue to consolidate, we believe retailers will support consumer product companies that can provide an attractive portfolio of products, a strong value proposition and efficient delivery.

• Volatility in the costs of raw materials. The costs of a substantial portion of the raw materials used in the beverage industry are dependent on commodity prices for aluminum, resin, corn, diesel, natural gas, pulp and other commodities. Commodity price volatility has exerted pressure on industry margins and operating results.

SEASONALITY
The beverage market is subject to some seasonal variations. Our beverage sales are generally higher during the warmer months and also can be influenced by the timing of holidays as well as weather fluctuations.
SEGMENTS
We report our business in three operating segments:
• The Beverage Concentrates segment reflects sales of our branded concentrates and syrup to third party bottlers primarily in the U.S. and Canada. Most of the brands in this segment are CSD 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 our 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 segment operating profit ("SOP") are the significant financial measures used to assess the operating performance of our operating segments.
VOLUME
In evaluating our performance, we consider different volume measures depending on whether we sell beverage concentrates or finished beverages. Beverage Concentrates Sales Volume
In our Beverage Concentrates segment, we measure our sales volume in two ways:
(1) "concentrate case sales" and (2) "bottler case sales." The unit of measurement for both concentrate case sales and bottler case sales equals 288 fluid ounces of finished beverage, the equivalent of 24 twelve ounce servings. Concentrate case sales represent units of measurement for concentrates sold by us to our bottlers and distributors. A concentrate case is the amount of concentrate needed to make one case of 288 fluid ounces of finished beverage. It does not include any other component of the finished beverage other than concentrate. Our net sales in our concentrate businesses are based on our sales of concentrate cases. Although net sales in our concentrate businesses are based on concentrate case sales, we believe that bottler case sales are also a significant measure of our performance because they measure sales of packaged beverages into retail channels.
Packaged Beverages 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 and concentrates and packaged beverage sales volumes are not equal during any given period due to changes in bottler concentrates inventory levels, which can be affected by seasonality, bottler inventory and manufacturing practices, and the timing of price increases and new product introductions.

RESULTS OF OPERATIONS
Executive Summary - 2012 Financial Overview and Recent Developments
• Net sales totaled $5,995 million for the year ended December 31, 2012, an increase of $92 million, or 2%, from the year ended December 31, 2011.

• Net income for the year ended December 31, 2012 was $629 million, compared to $606 million for the year ended December 31, 2011, an increase of $23 million, or 4%.

• Diluted earnings per share was $2.96 for the year ended December 31, 2012 and $2.74 for the year ended December 31, 2011. The diluted earnings per share for the year ended December 31, 2012 increased by 8%.

• During 2012, our Board of Directors (our "Board") declared dividends of $1.36 per share on outstanding common stock, as compared to $1.21 per share on outstanding common stock during 2011. Dividends declared per share for the year ended December 31, 2012 increased by 12%.

• During the three and twelve months ended December 31, 2012, we repurchased 3.2 million and 9.5 million shares, respectively, of our common stock valued at approximately $138 million and $400 million, respectively.

• On October 26, 2012, Standard & Poor's ("S&P") affirmed our debt rating of BBB and revised its outlook to positive from stable.

• On November 20, 2012, the Company completed the issuance of $500 million aggregate principal amount of senior unsecured notes consisting of $250 million aggregate principal amount of 2.00% senior notes due January 15, 2020 (the "2020 Notes") and $250 million aggregate principal amount of 2.70% senior notes due November 15, 2022 (the "2022 Notes"). The net proceeds from the issuance were used to repay the aggregate principal amount of the 2.35% senior notes due December 21, 2012 (the "2012 Notes") at maturity and for general corporate purposes.

• On January 1, 2013, we launched five new additions (7UP, Sunkist soda, A&W, Canada Dry and RC Cola) to our TEN platform, which uses a unique blend of sweeteners developed by us to achieve a low-calorie option with the full flavor of the regular option.

• During the first quarter of 2013, our Board declared a dividend of $0.38 per share, which will be paid on April 5, 2013, to shareholders of record as of March 15, 2013. The dividend declared during the first quarter of 2013 increased 12% compared to the dividend declared in the previous quarter.

References in the financial tables to percentage changes that are not meaningful are denoted by "NM."

Year Ended December 31, 2012 Compared to Year Ended December 31, 2011
Consolidated Operations
The following table sets forth our consolidated results of operations for the
years ended December 31, 2012 and 2011 (dollars in millions, except per share
data):
                                               For the Year Ended December 31,
                                                2012                    2011              Percentage
                                         Dollars     Percent     Dollars     Percent        Change
Net sales                               $ 5,995      100.0  %   $ 5,903      100.0  %          2 %
Cost of sales                             2,500       41.7        2,485       42.1
Gross profit                              3,495       58.3        3,418       57.9             2
Selling, general and administrative
expenses                                  2,268       37.8        2,257       38.3
Depreciation and amortization               124        2.1          126        2.1
Other operating expense, net                 11        0.2           11        0.2
Income from operations                    1,092       18.2        1,024       17.3             7
Interest expense                            125        2.1          114        1.9
Interest income                              (2 )        -           (3 )     (0.1 )
Other income, net                            (9 )     (0.2 )        (12 )     (0.2 )
Income before provision for income
taxes and equity in earnings of
unconsolidated subsidiaries                 978       16.3          925       15.7             6
Provision for income taxes                  349        5.8          320        5.5
Income before equity in earnings of
unconsolidated subsidiaries                 629       10.5          605       10.2
Equity in earnings of unconsolidated
subsidiaries, net of tax                      -          -            1          -
Net income                              $   629       10.5  %   $   606       10.3  %          4 %

Earnings per common share:
Basic                                   $  2.99         NM      $  2.77         NM             8 %
Diluted                                 $  2.96         NM      $  2.74         NM             8 %

Volume (BCS). Volume (BCS) decreased 1% for the year ended December 31, 2012, compared with the year ended December 31, 2011. In the U.S. and Canada, volume declined 1%, and in Mexico and the Caribbean, volume increased 2%, in each case compared with the year ago period. CSD volume was flat, while NCB volume decreased 5%. In CSDs, Dr Pepper volume was flat 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 offset by declines in Cherry and diet Dr Pepper. Canada Dry, 7UP, A&W and Sunkist soda, Sun Drop (our "Core 5 brands") brands were flat compared to the year ago period as a mid single-digit increase in Canada Dry was offset by a double-digit decrease in Sun Drop due to cycling the national launch of the brand in the prior year, and low single-digit declines in 7UP and Sunkist soda. Peñafiel increased 5% as a result of package innovation. Schweppes grew 5% reflecting growth in the ginger ale category. Squirt increased 1% while Crush decreased 4%. Our other CSD brands decreased 3% for the year ended December 31, 2012, led by Welch's. Decreases in NCBs were driven by a 17% decrease in Hawaiian Punch as a result of price increases and a 7% decrease in Mott's due to net price increases and lower promotional activity. These decreases were partially offset by a 15% increase in Clamato, a 3% increase in Snapple as a result of package and flavor innovation and a 2% increase in our water category. Our water category was led by strong performances by Vita Coco, Deja Blue and FIJI in our Packaged Beverages segment, partially offset by declines in Aguafiel as a result of lower promotional activity in our Latin America Beverages segment.
Net Sales. Net sales increased $92 million, or approximately 2%, for the year ended December 31, 2012, compared with the year ended December 31, 2011. The increase was attributable to price increases and favorable mix. These drivers were partially offset by lower sales volumes and the unfavorable impact of foreign currency.

Gross Profit. Gross profit increased $77 million, or approximately 2%, for the year ended December 31, 2012, compared with the year ended December 31, 2011. Gross margin of 58.3% for the year ended December 31, 2012 was higher than the 57.9% gross margin for the year ended December 31, 2011. Significant factors causing the increase in gross margin were increases in our net price realization and $15 million of unrealized gains during the year ended December 31, 2012 for the mark-to-market activity on commodity derivative contracts, which were partially offset by higher costs for apples, flavors, apple juice concentrate, packaging, sweeteners and other commodities. The mark-to-market activity on commodity derivative contracts generated $22 million of unrealized losses for the year ended December 31, 2011.
Income from Operations and Selling, General and Administrative Expenses. Income from operations increased $68 million to $1,092 million for the year ended December 31, 2012, principally due to the increase in our gross profit partially offset by the increase in selling, general and administrative ("SG&A") expenses. As a percentage of net sales, our SG&A expenses improved to 37.8% for the year ended December 31, 2012, compared to 38.3% in the prior year, SG&A expenses increased $11 million for the year ended December 31, 2012 compared with the prior period. The increase was the result of higher labor and benefit costs and an increase in marketing investments. These increases were partially offset by lower transportation costs, lower professional fees driven by the favorable comparison to the $18 million legal provision associated with litigation against The American Bottling Company ("ABC litigation") recorded during the prior year 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 and lower distribution fees as a result of lower NCB volumes from our Packaged Beverages segment.
Interest Expense, Interest Income and Other Income, Net. Interest expense increased $11 million for the year ended December 31, 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 $9 million for the year ended December 31, 2012, which related primarily to indemnity income associated with the Tax Sharing and Indemnification Agreement ("Tax Indemnity Agreement") with Mondel?z.
Provision for Income Taxes. The effective tax rates for the year ended December 31, 2012 and 2011 were 35.7% and 34.6%, 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 year ended December 31, 2011 by $19 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 SOP. The
following tables set forth net sales and SOP for our segments for 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 Year Ended
                                                                  December 31,
                                                              2012             2011
Segment Results - Net sales
Beverage Concentrates                                    $      1,221      $     1,193
Packaged Beverages                                              4,358            4,292
Latin America Beverages                                           416              418
Net sales                                                $      5,995      $     5,903


                                                               For the Year Ended
                                                                  December 31,
                                                              2012             2011
Segment Results - SOP
Beverage Concentrates                                    $        774      $       779
Packaged Beverages                                                539              519
Latin America Beverages                                            51               43
Total SOP                                                       1,364            1,341
Unallocated corporate costs                                       261              306
Other operating expense, net                                       11               11
Income from operations                                          1,092            1,024
Interest expense, net                                             123              111
Other income, net                                                  (9 )            (12 )
Income before provision for income taxes and equity in
earnings of unconsolidated subsidiaries                  $        978      $       925

BEVERAGE CONCENTRATES
The following table details our Beverage Concentrates segment's net sales and
SOP for the years ended December 31, 2012 and 2011 (in millions):
              For the Year Ended
                 December 31,
                2012           2011      Change
Net sales $    1,221         $ 1,193    $   28
SOP              774             779        (5 )

Net Sales. Net sales increased $28 million, for the year ended December 31, 2012, compared with the year ended December 31, 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 $5 million, or approximately 1%, for the year ended December 31, 2012, as compared with the year ago period. The decrease was primarily driven by $21 million of higher marketing investments and increased costs for our commodities, led by flavors. These decreases were partially offset by the benefit of higher net sales.
Volume (BCS). Volume (BCS) was flat for the year ended December 31, 2012, as compared with the year ago period. Our Core 5 brands decreased approximately 1% compared to the prior year as a result of high single-digit declines in Sunkist soda, and Sun Drop and low single-digit decreases in 7UP and A&W, partially offset by a mid single-digit increase in Canada Dry. Crush had a mid single-digit decline. Dr Pepper volume was flat due to increases in regular Dr Pepper and Dr Pepper TEN, which launched in the fourth quarter of 2011, offset by declines in Cherry and Diet.

PACKAGED BEVERAGES
The following table details our Packaged Beverages segment's net sales and SOP
for the years ended December 31, 2012 and 2011 (in millions):
              For the Year Ended
                 December 31,
                2012           2011      Change
Net sales $    4,358         $ 4,292    $    66
SOP              539             519         20

Volume. Total sales volume decreased 2% for the year ended December 31, 2012, compared with the year ended December 31, 2011, driven by lower NCB volumes. Within CSDs, volume was flat for the year ended December 31, 2012, compared with the year ended December 31, 2011. Volume for our Core 5 brands increased 1%, led by a high single-digit increase in Canada Dry, mid single-digit increase in Sunkist soda, as a result of flavor expansion, 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, while 7UP had a mid single-digit decrease. Dr Pepper volumes decreased 1% for the year ended December 31, 2012, as decreased volume in base Dr Pepper was partially offset by growth of Dr Pepper TEN, which launched in the fourth quarter of 2011. Squirt increased 2%, while our other brands, which include Welch's, decreased 2% for the year ended December 31, 2012.
Within NCBs, volume decreased 5%. Hawaiian Punch declined 17% as a result of price increases, while Mott's decreased 7% as a result of net pricing increases and lower promotional activity. These decreases were partially offset by a 12% increase in our water category, led by Vita Coco and Deja Blue, and a 2% increase in Snapple due to package and flavor innovation.
Net Sales. Net sales increased $66 million for the year ended December 31, 2012, compared with the year ended December 31, 2011. Net sales increased due to favorable mix and net pricing increases for CSDs, Mott's and Hawaiian Punch. These increases were partially offset by a decrease in our sales volumes. SOP. SOP increased $20 million for the year ended December 31, 2012, compared with the year ended December 31, 2011. Significant factors included the benefit of higher net sales partially offset by higher labor and benefit costs. Other positive factors that impacted SOP included ongoing productivity improvements, lower distribution fees, which were primarily a result of lower NCB volumes, and the favorable comparison of the ABC litigation recorded in the prior year. These positive factors were partially offset by higher costs for our commodities, increased manufacturing costs and an increase in our last-in, first out ("LIFO") provision. The higher costs for our commodities, which impacted the increase in our LIFO provision, were led by apples, flavors, apple juice concentrate and PET.

LATIN AMERICA BEVERAGES
The following table details our Latin America Beverages segment's net sales and
SOP for the years ended December 31, 2012 and 2011 (in millions):
               For the Year Ended
                  December 31,
                 2012            2011     Change
Net sales $     416             $ 418    $   (2 )
SOP              51                43         8

Volume. Sales volume increased 2% for the year ended December 31, 2012, as compared with the year ended December 31, 2011, as volume increased in virtually all of our brands except Aguafiel. The increase in volume was led by a 5% increase in Peñafiel as a result of package innovations, an 11% increase in Crush, a 14% increase in Clamato and a double-digit increase in Dr Pepper due to targeted marketing programs. These increases in sales volume were partially offset by a 9% decrease in Aguafiel as a result of lower promotional activity. Net Sales. Net sales decreased $2 million for the year ended December 31, 2012, compared with the year ended December 31, 2011. Net sales decreased as a result of $21 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 increased sales volumes, favorable product mix and price increases.
SOP. SOP increased $8 million, or approximately 19%, for the year ended December 31, 2012, compared with the year ended December 31, 2011, primarily due to the impact of favorable product mix, price increases, increased sales volumes and ongoing productivity improvements. These increases were partially offset by approximately $9 million of unfavorable foreign currency effects, higher logistics costs, increased cost for our commodities, led by sweeteners and flavors, and higher marketing investments.

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