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DPS > SEC Filings for DPS > Form 10-K on 20-Feb-2014All Recent SEC Filings

Show all filings for DR PEPPER SNAPPLE GROUP, INC.

Form 10-K for DR PEPPER SNAPPLE GROUP, INC.


20-Feb-2014

Annual Report


ITEM 7. 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 the related Notes thereto included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that are based on management's current expectations, estimates and projections about our business and operations. Our actual results may differ materially from those currently anticipated and expressed in such forward-looking statements as a result of various factors including the factors we describe under "Special Note Regarding Forward-Looking Statements", "Risk Factors" and elsewhere in this Annual Report on Form 10-K.
References in the following discussion to "we", "our", "us", "DPS" or "the Company" refer to Dr Pepper Snapple Group, Inc. and all entities included in our Audited 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 Mondel?z International, Inc. ("Mondel?z").
The periods presented in this section are the years ended December 31, 2013, 2012 and 2011, which we refer to as "2013", "2012" and "2011", respectively.
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, Pe๑afiel 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.
We operate primarily in the U.S., Mexico and Canada and we also distribute our products in the Caribbean. In 2013, 88% of our net sales were generated in the U.S., 4% in Canada and 8% in Mexico and the Caribbean.
UNCERTAINTIES AND TRENDS AFFECTING OUR BUSINESS We believe the North American Liquid Refreshment Beverage ("LRB") market is influenced by certain key trends and uncertainties. Some of these items, such as increased health consciousness and changes in economic factors, have created continued category headwinds for our CSDs during the year ended December 31, 2013 and have unfavorably impacted our sales volumes compared to the prior year. The key trends and uncertainties that could affect our business include:
• Increased health consciousness. Consumers are increasingly becoming more concerned about health and wellness, focusing on caloric intake and sugar content in both regular CSDs and juices and the use of artificial sweeteners in diet CSDs. We believe the main beneficiaries of this trend include naturally sweetened, low calorie drinks, all natural and organic beverages, ready-to-drink teas and bottled waters.

• Increased government regulation. Government agencies, as a result of concerns about the public health consequences and health care costs associated with obesity, have been proposing and, in some cases, enacting new taxes or regulations on sugar-sweetened beverages. Any changes of regulations or imposed taxes could reduce demand and/or cause us to raise our prices.

• Changes in economic factors. We believe changes in economic factors, including forms of government assistance such as the Supplemental Nutrition Assistance Program, could impact consumers' purchasing power which may result in a decrease in purchases of our products.


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• Changes in consumer preferences. We are impacted by shifting consumer demographics and needs. We believe marketing and product innovations that target fast growing population segments, such as the Hispanic community in the U.S., could drive market growth. Additionally, as more consumers are faced with a busy and on-the-go lifestyle, sales of single-serve beverages could increase, which typically have higher margins.

• Increased competition in the LRB market. A number of our competitors are large corporations with significant financial resources. These competitors can use their resources and scale to rapidly respond to competitive pressures and changes in consumer preferences by introducing new products, reducing prices or increasing promotional activities, which could reduce the demand for our products.

• 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, corn, resin, diesel, natural gas, pulp and other commodities. We are also dependent on commodity prices for apples related to our applesauce production. Commodity price volatility has exerted pressure on industry margins and operating results.

As a result of these uncertainties and other factors, we believe net sales for the year ending December 31, 2014 could be up only 1% as compared to the year ended December 31, 2013.
Refer to Item 1A, "Risk Factors" of this Annual Report on Form 10-K for additional information about risks and uncertainties facing our Company.
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, Caribbean and other international 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.


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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.


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RESULTS OF OPERATIONS
Executive Summary - 2013 Financial Overview and Recent Developments
• Net sales totaled $5,997 million for the year ended December 31, 2013, an increase of $2 million from the year ended December 31, 2012.

• Net income for the year ended December 31, 2013 was $624 million, compared to $629 million for the year ended December 31, 2012, a decrease of $5 million, or approximately 1%.

• Diluted earnings per share was $3.05 for the year ended December 31, 2013 and $2.96 for the year ago period, an increase of $0.09, or approximately 3%.

• Earnings for the year ended December 31, 2013 included a $33 million non-cash increase in net income associated with the conclusion of an Internal Revenue Service ("IRS") audit and a $12 million non-cash reduction in net income associated with a change in Canadian tax law. These two items increased diluted earnings per share by $0.10 during the year ended December 31, 2013.

• Earnings for the year ended December 31, 2013 also included a $56 million non-cash charge related to our intention to withdraw from the Soft Drink Industry Local Union 710 Pension Fund ("Local 710"), which decreased diluted earnings per share by $0.17 during the year ended December 31, 2013.

• During 2013, our Board of Directors (our "Board") declared aggregate dividends of $1.52 per share on outstanding common stock, as compared to $1.36 per share on outstanding common stock during 2012. Dividends declared per share for the year ended December 31, 2013 increased approximately 12%.

• On November 13, 2013, Standard & Poor's ("S&P") raised our rating from BBB with a positive outlook to BBB+ with a stable outlook.

• During the years ended December 31, 2013 and 2012, we repurchased 8.7 million and 9.5 million shares of our common stock, respectively, valued at approximately $400 million each year.

• During the first quarter of 2014, our Board declared a dividend of $0.41 per share, which will be paid on April 4, 2014, to shareholders of record as of March 17, 2014. The dividend declared during the first quarter of 2014 increased approximately 8% 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."


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Year Ended December 31, 2013 Compared to Year Ended December 31, 2012
Consolidated Operations
The following table sets forth our consolidated results of operations for the
years ended December 31, 2013 and 2012 (dollars in millions, except per share
data):
                                               For the Year Ended December 31,
                                                2013                    2012              Percentage
                                         Dollars     Percent     Dollars     Percent        Change
Net sales                               $ 5,997      100.0  %   $ 5,995      100.0  %          -  %
Cost of sales                             2,499       41.7        2,500       41.7
Gross profit                              3,498       58.3        3,495       58.3             -
Selling, general and administrative
expenses                                  2,272       37.9        2,268       37.8
Multi-employer pension plan withdrawal       56        2.2            -          -
Depreciation and amortization               115        1.9          124        2.1
Other operating expense, net                  9        0.2           11        0.2
Income from operations                    1,046       17.4        1,092       18.2            (4 )
Interest expense                            123        2.0          125        2.1
Interest income                              (2 )        -           (2 )        -
Other expense (income), net                 383        6.4           (9 )     (0.2 )
Income before (benefit) provision for
income taxes and equity in earnings of
unconsolidated subsidiaries                 542        9.0          978       16.3            NM
(Benefit) provision for income taxes        (81 )     (1.4 )        349        5.8
Income before equity in earnings of
unconsolidated subsidiaries                 623       10.4          629       10.5
Equity in earnings of unconsolidated
subsidiaries, net of tax                      1          -            -          -
Net income                              $   624       10.4  %   $   629       10.5  %         (1 )%

Earnings per common share:
Basic                                   $  3.08         NM      $  2.99         NM             3  %
Diluted                                 $  3.05         NM      $  2.96         NM             3  %

Volume (BCS). Volume (BCS) decreased 2% for the year ended December 31, 2013 compared with the year ended December 31, 2012. In the U.S. and Canada, volume declined 2%, and in Mexico and the Caribbean, volume increased 3%, compared with the year ago period. Both CSD volume and NCB volume declined 2%.
In CSDs, volumes were unfavorably impacted by continued category headwinds which included increased consumer concerns about health and wellness. Dr Pepper volume declined 2%. Our Core 4 brands, which included the impact of the launch of our Core 4 TEN products, decreased 1% compared to the year ago period. This result was driven by a a 5% decrease in 7UP, a 7% decline in Sunkist soda and a 2% decrease in A&W, partially offset by a 6% increase in Canada Dry. Crush, Squirt and RC Cola declined 7%, 4% and 4%, respectively. Sun Drop declined double-digits. Other brands in total declined 3%. These decreases were partially offset by growth of 11% in Pe๑afiel as a result of product and package innovation and a 6% increase in Schweppes reflecting distribution gains in our seltzer water and growth in the ginger ale category.
In NCBs, decreases were driven by a 9% decrease in Hawaiian Punch as a result of lower promotional activity and declines within the category and an 8% decline in other brands. The decline was partially offset by a 2% increase in Snapple as a result of package and product innovation and a 3% increase in Mott's due to distribution gains in our juice and sauce categories. Our water category increased 3%, led by Aguafiel. Clamato increased 6%.
Net Sales. Net sales increased $2 million for the year ended December 31, 2013 compared with the year ended December 31, 2012. The increase was attributable to favorable mix, net pricing increases and favorable foreign currency translation, substantially offset by lower branded sales volumes and an unfavorable comparison of trade adjustments.


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Gross Profit. Gross profit increased $3 million for the year ended December 31, 2013 compared with the year ended December 31, 2012. Gross margin was 58.3% for both years ended December 31, 2013 and 2012. Significant activity within the gross margin included the $58 million favorable comparison in our LIFO inventory provision, driven by the higher prices of apples in the prior year, and increases in our net price realization. These favorable changes were offset by increases in our commodity costs, led by apples and sweeteners, the $30 million unfavorable comparison for the mark-to-market activity on commodity derivative contracts and unfavorable mix due to a higher mix of finished goods rather than concentrates, as well as package and product mix. The change in our LIFO inventory provision for the year ended December 31, 2013 was a $39 million reduction in the provision versus a $19 million increase in the provision for the year ended December 31, 2012. The mark-to-market activity on commodity derivative contracts for the year ended December 31, 2013 was $15 million in unrealized losses versus $15 million in unrealized gains in the year ago period. Selling, General and Administrative Expenses. SG&A expenses increased $4 million for the year ended December 31, 2013 compared with the prior period. The increase was primarily the result of $7 million in workforce reduction costs, incremental operating costs associated with the acquisition of certain assets of Dr. Pepper/7-UP Bottling Company of the West ("DP/7UP West") , increased marketing investments and the unfavorable comparison for the mark-to-market activity on commodity derivative contracts. These increases were partially offset by lower labor and benefit costs, a $6 million favorable adjustment in 2013 to the legal provision associated with litigation against The American Bottling Group as a result of settlement agreements with certain plaintiffs ("ABC litigation") and lower logistics costs.
Multi-employer Pension Plan Withdrawal. We recognized a non-cash charge of $56 million related to our intention to withdraw from Local 710. Refer to Note 14 of the Notes to our Audited Consolidated Financial Statements for further information on this charge.
Income from Operations. Income from operations decreased $46 million to $1,046 million for the year ended December 31, 2013, principally due to the non-cash charge for the multi-employer pension plan withdrawal and an increase in SG&A expenses partially offset by the decline in depreciation and amortization driven by the favorable comparison to the $8 million depreciation adjustment recorded in the prior year.
Other Expense, Net and (Benefit) Provision for Income Taxes. We have historically recorded indemnification income from Mondel?z under the Tax Sharing and Indemnification Agreement ("Tax Indemnity Agreement") as other expense (income), net in the Consolidated Statements of Income. Due to the completion of the IRS audit for our 2006-2008 federal income tax returns in August 2013, we recognized an income tax benefit of $463 million primarily related to decreasing our liability for unrecognized tax benefits and $430 million of other expense, net, as we no longer anticipate collecting amounts from Mondel?z. Additionally, in June 2013, a bill was enacted by the Canadian government, which reduced amounts amortized for income tax purposes. As a result, we recognized $38 million of indemnity income due to the reduction of our long-term liability to Mondel?z and $50 million of income tax expense for the reduction of our tax assets.
The following table excludes these amounts discussed above from our other expense (income), net, (loss) income before (benefit) provision for income taxes and equity in earnings of unconsolidated subsidiaries and (benefit) provision for income taxes lines within our Consolidated Statements of Income. We have presented this table as we believe the effect of those items on these lines and on our effective tax rate for the year ended December 31, 2013 are not meaningful as reported.

                                            For the Year Ended December 31, 2013
                                                Completion of     Enactment of     As reported
                                                the IRS audit     the Canadian    excluding tax     For the Year
                                                  in August       bill in June    and indemnity    Ended December
(in millions)                 As reported           2013              2013            items           31, 2012
Other expense (income), net $       383         $      (430 )    $         38     $         (9 )   $        (9 )
Income before (benefit)
provision for income taxes
and equity in earnings of
unconsolidated subsidiaries         542                 430               (38 )            934             978
(Benefit) provision for
income taxes                        (81 )               463               (50 )            332             349

Effective tax rate                (14.9 )%                                                35.5 %          35.7 %


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Results of Operations by Segment
The following tables set forth net sales and SOP for our segments for the year
ended December 31, 2013 and 2012, as well as the other amounts necessary to
reconcile our total segment results to our consolidated results presented in
accordance with U.S. GAAP (in millions):
                                                                For the Year Ended
                                                                   December 31,
                                                               2013              2012
Segment Results - Net sales
Beverage Concentrates                                    $      1,229        $     1,221
Packaged Beverages                                              4,306              4,358
Latin America Beverages                                           462                416
Net sales                                                $      5,997        $     5,995

                                                                For the Year Ended
                                                                   December 31,
                                                               2013              2012
Segment Results - SOP
Beverage Concentrates                                    $        778        $       774
Packaged Beverages                                                525                539
Latin America Beverages                                            61                 51
Total SOP                                                       1,364              1,364
Unallocated corporate costs                                       309                261
Other operating expense, net                                        9                 11
Income from operations                                          1,046              1,092
Interest expense, net                                             121                123
Other expense (income), net                                       383                 (9 )
Income before provision for income taxes and equity in
earnings of unconsolidated subsidiaries                  $        542        $       978

BEVERAGE CONCENTRATES
The following table details our Beverage Concentrates segment's net sales and
SOP for the years ended December 31, 2013 and 2012 (in millions):
              For the Year Ended
                 December 31,
                2013           2012      Change
Net sales $    1,229         $ 1,221    $     8
SOP              778             774          4

Net Sales. Net sales increased $8 million for the year ended December 31, 2013, compared with the year ended December 31, 2012. The increase was due to an increase in concentrate prices, favorable product mix and lower discounts, which were largely offset by a 4% decline in concentrate case sales.
SOP. SOP increased $4 million for the year ended December 31, 2013, compared with the year ended December 31, 2012, primarily due to the gross margin impact of higher net sales and lower labor and benefit costs, partially offset by a higher transfer pricing allocation and $5 million of higher marketing investments.


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Volume (BCS). Volume (BCS) decreased 2% as a result of continued category headwinds for the year ended December 31, 2013 compared with the year ended December 31, 2012, primarily driven by a 2% decline in Dr Pepper and a 7% decrease in Crush. Other drivers of the decline include a 7% decline in RC Cola, a 6% decrease in Sun Drop and a 6% decline in Squirt. These declines were partially offset by a 6% increase in Schweppes reflecting distribution gains in our seltzer water and growth in the ginger ale category. Our Core 4 brands, which included the impact of the launch of our Core 4 TEN products, were flat compared to the prior year as a result of a 7% decline in Sunkist soda, a 4% decrease in 7UP and a 3% decline in A&W, offset by a 4% increase in Canada Dry.

PACKAGED BEVERAGES
The following table details our Packaged Beverages segment's net sales and SOP
for the years ended December 31, 2013 and 2012 (in millions):
              For the Year Ended
                 December 31,
                2013           2012      Change
Net sales $    4,306         $ 4,358    $  (52 )
SOP              525             539       (14 )

Volume. Total sales volume decreased 3% for the year ended December 31, 2013 compared with the year ended December 31, 2012. Lower NCB volumes, CSD volumes and contract manufacturing each decreased our total segment sales volume by 1%. Within CSDs, volume declined 2% for the year ended December 31, 2013 compared with the year ended December 31, 2012, as a result of continued category headwinds. Volume for our Core 4 brands, which includes the impact of the launch of our Core 4 TEN products, decreased 1% for the year ended December 31, 2013, led by a 7% decline in Sunkist soda, a 3% decrease in 7UP and an 1% decline in A&W, partially offset by a double digit increase in Canada Dry. Dr Pepper . . .

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