Keurig Dr Pepper - 10-Q quarterly report FY

 

 

 
Commission file number 001-33829

       Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ     No o

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yeso      No o

      Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).
Yeso     No þ

     As of May 6, 2009, there were 253,861,753 shares of the registrant’s common stock, par value $0.01 per share, outstanding.

 

 

Item 1. Financial Statements. 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

DR PEPPER SNAPPLE GROUP, INC.

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

     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.

     This 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 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, 2008.

     For the periods prior to May 7, 2008, the condensed consolidated financial statements have been prepared on a “carve-out” basis from Cadbury’s consolidated financial statements using historical results of operations, assets and liabilities attributable to Cadbury’s beverage business in the United States, Canada, Mexico and the Caribbean (“the Americas Beverages business”) and including allocations of expenses from Cadbury. The historical Americas Beverages business information is the Company’s predecessor financial information. The Company eliminates from its financial results all intercompany transactions between entities included in the consolidation and the intercompany transactions with its equity method investees.

     The unaudited condensed consolidated financial statements may not be indicative of the Company’s future performance and may not reflect what its consolidated results of operations, financial position and cash flows would have been had the Company operated as an independent company during all of the periods presented.

     Prior to the May 7, 2008, separation, Cadbury provided certain corporate functions to the Company and costs associated with these functions were allocated to the Company. These functions included corporate communications, regulatory, human resources and benefit management, treasury, investor relations, corporate controller, internal audit, Sarbanes Oxley compliance, information technology, corporate and legal compliance, and community affairs. The costs of such services were allocated to the Company based on the most relevant allocation method to the service provided, primarily based on relative percentage of revenue or headcount. Management believes such allocations were reasonable; however, they may not be indicative of the actual expense that would have been incurred had the Company been operating as an independent company for all of the periods presented. The charges for these functions are included primarily in selling, general, and administrative expenses in the Condensed Consolidated Statements of Operations.

   Use of Estimates

     The process of preparing DPS’ unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires the use of estimates and judgments that affect the reported amounts of assets, liabilities, revenue, and expenses. These estimates and judgments are based on historical experience, future expectations and other factors and assumptions the Company believes to be reasonable under the circumstances. The most significant estimates and judgments are reviewed on an ongoing basis and revised when necessary. Actual amounts may differ from these estimates and judgments. The Company has identified the following policies as critical accounting policies:

     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, 2008.

   Restatement of Net Sales and Cost of Sales related to Intercompany Eliminations

     As detailed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008, subsequent to the issuance of the Company’s 2007 Combined Annual Financial Statements the Company identified an error in the presentation of the previously reported net sales and cost of sales captions on the Statement of Operations. For the three months ended March 31, 2008, the Company’s Condensed Combined Statement of Operations included $12 million of intercompany transactions that should have been eliminated upon consolidation.

     In order to correct the error, the net sales and cost of sales captions have been restated in the Condensed Consolidated Statement of Operations from the amounts previously reported as follows (in millions):

     These adjustments to the Condensed Consolidated Statements of Operations do not affect the Company’s Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of Changes in Stockholders’ Equity, Condensed Consolidated Statements of Cash Flows, gross profit, income from operations or net income.

   Recently Issued Accounting Standards

     In April 2009, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) No. SFAS 107-1 and
APB No. 28-1, Disclosures about the Fair Value of Financial Instruments(“FSP FAS 107-1 and APB 28-1”). FSP FAS 107-1 and APB 28-1, which requires disclosures about the fair value of financial instruments in interim financial statements as well as in annual financial statements, is effective for interim periods ending after June 15, 2009, but early adoption is permitted for interim periods ending after March 15, 2009. The Company will provide the required disclosures starting with the quarter ended June 30, 2009.

     In December 2008, the FASB issued FSP No.132(R)-1, Employers’ Disclosures about Pensions and Other Postretirement Benefits (“FSP 132R-1”). FSP 132R-1 requires enhanced disclosures about the plan assets of a Company’s defined benefit pension and other postretirement plans intended to provide users of financial statements with a greater understanding of: (1) how investment allocation decisions are made, including the factors that are pertinent to an understanding of investment policies and strategies; (2) the major categories of plan assets; (3) the inputs and valuation techniques used to measure the fair value of plan assets; (4) the effect of fair value measurements using significant unobservable inputs (Level 3) on changes in plan assets for the period; and (5) significant concentrations of risk within plan assets. FSP 132R-1 is effective for years ending after December 15, 2009. The Company will provide the required disclosures for all its filings for periods subsequent to the effective date.

   Recently Adopted Accounting Standards

     In April 2008, the FASB issued FASB Staff Position No. 142-3, Determination of the Useful Life of Intangible Assets (“FSP 142-3”). FSP 142-3 amends the factors that should be considered in developing assumptions about renewal or extension used in estimating the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS 142”). This standard is intended to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141 (revised 2007), Business Combinations (“SFAS 141(R)”) and other GAAP. FSP 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008 and the Company has adopted the provisions of FSP 142-3 effective January 1, 2009. The measurement provisions of this standard applied only to intangible assets acquired after the effective date and its adoption did not have a material impact on the Company’s unaudited condensed consolidated financial statements for the three months ended March 31, 2009.

     In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities (“SFAS 161”). SFAS 161 changes the disclosure requirements for derivative instruments and hedging activities, requiring enhanced disclosures about how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended(“SFAS 133”), and how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. The Company adopted the provisions of SFAS 161 effective January 1, 2009. Refer to Note 12 for further information.

     In December 2007, the FASB issued SFAS 141(R). SFAS 141(R) changes how business acquisitions are accounted for and will impact financial statements both on the acquisition date and in subsequent periods. Some of the changes, such as the accounting for contingent consideration, will introduce more volatility into earnings. SFAS 141(R) applies to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. SFAS 141(R) was effective for the Company beginning January 1, 2009, and the Company will apply SFAS 141(R) prospectively to all business combinations subsequent to the effective date.

     In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements — an amendment of Accounting Research Bulletin No. 51 (“SFAS 160”). SFAS 160 establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and the deconsolidation of a subsidiary and also establishes disclosure requirements that clearly identify and distinguish between the controlling and noncontrolling interests and requires the separate disclosure of income attributable to the controlling and noncontrolling interests. SFAS 160 was effective for fiscal years beginning after December 15, 2008. The Company adopted the provisions of SFAS 160 on a prospective basis as of January 1, 2009. The adoption of SFAS 160 did not have a material impact on the Company’s unaudited condensed consolidated financial statements for the three months ended March 31, 2009.

     In September 2006, the FASB issued SFAS 157 which defines fair value, establishes a framework for measuring fair value and expands disclosure requirements about fair value measurements. SFAS 157 is effective for the Company January 1, 2008. However, in February 2008, the FASB released FASB Staff Position FAS 157-2, Effective Date of FASB Statement No. 157 (“FSP FAS 157-2”), which delayed the effective date of SFAS 157 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually) to January 1, 2009. The Company adopted the deferred provisions of SFAS 157 on January 1, 2009. The adoption of the deferred provisions of SFAS 157 for the Company’s non-financial assets and liabilities did not have a material impact on its unaudited condensed consolidated financial statements.

     Inventories as of March 31, 2009, and December 31, 2008, consisted of the following (in millions):

     Changes in the carrying amount of goodwill for the three months ended March 31, 2009, by operating segment are as follows (in millions):

     The net carrying amounts of intangible assets other than goodwill as of March 31, 2009, and December 31, 2008, are as follows
(in millions):

     As of March 31, 2009, the weighted average useful lives of intangible assets with finite lives were 10 years, 7 years and 8 years for brands, customer relationships and bottler agreements, respectively. Amortization expense for intangible assets was $4 million and $7 million for the three months ended March 31, 2009 and 2008, respectively.

     Amortization expense of these intangible assets over the remainder of 2009 and the next four years is expected to be the following
(in millions):

     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. If the carrying amount of goodwill exceeds its implied fair value or the carrying amount of an intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. The Company uses present value and other valuation techniques to make this assessment. DPS did not identify any circumstances that indicated that the carrying amount of an asset may not be recoverable during the three months ended March 31, 2009.

     Accounts payable and accrued expenses consisted of the following as of March 31, 2009, and December 31, 2008 (in millions):

     The following table summarizes the Company’s long-term debt obligations as of March 31, 2009, and December 31, 2008 (in millions):

     The following is a description of the Company’s senior unsecured credit agreement and revolving credit facility (collectively, the “senior unsecured credit facility”) and the senior unsecured notes. The summaries of the senior unsecured credit facility and the senior unsecured notes are qualified in their entirety by the specific terms and provisions of the senior unsecured credit agreement and the indenture governing the senior unsecured notes, respectively, copies of which have previously been filed, as referenced in the exhibits to the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.

     The Company’s senior unsecured credit agreement provides senior unsecured financing of up to $2.7 billion, consisting of:

     Borrowings under the senior unsecured credit facility bear interest at a floating rate per annum based upon the London interbank offered rate for dollars (“LIBOR”) or the alternate base rate (“ABR”), in each case plus an applicable margin which varies based upon the Company’s debt ratings, from 1.00% to 2.50%, in the case of LIBOR loans and 0.00% to 1.50% in the case of ABR loans. The alternate base rate means the greater of (a) JPMorgan Chase Bank’s prime rate and (b) the federal funds effective rate plus one half of 1%. Interest is payable on the last day of the interest period, but not less than quarterly, in the case of any LIBOR loan and on the last day of March, June, September and December of each year in the case of any ABR loan. The average interest rate for the three months ended March 31, 2009, was 5.1%. Interest expense was $26 million for the three months ended March 31, 2009, including amortization of deferred financing costs of $4 million. 

     The Company utilizes interest rate swaps to convert variable interest rates to fixed rates. During the first quarter of 2009, the Company had swaps with notional amounts of $500 million and $1.2 billion. See Note 12 for further information regarding derivatives.

     An unused commitment fee is payable quarterly to the lenders on the unused portion of the commitments in respect of the revolving credit facility equal to 0.15% to 0.50% per annum, depending upon the Company’s debt ratings. The Company incurred less than $1 million in unused commitment fees for the three months ended March 31, 2009. Additionally, interest expense included $1 million of amortization of deferred financing costs associated with the revolving credit facility.

     The Company is required to pay annual amortization in equal quarterly installments on the aggregate principal amount of the term loan A equal to: (i) 10%, or $220 million, per year for installments due in the first and second years following the initial date of funding, (ii) 15%, or $330 million, per year for installments due in the third and fourth years following the initial date of funding, and (iii) 50%, or $1.1 billion, for installments due in the fifth year following the initial date of funding. Principal amounts outstanding under the revolving credit facility are due and payable in full at maturity. Through March 31, 2009, the Company has made combined scheduled and optional repayments toward the principal totaling $550 million, including $220 million of scheduled repayments. Of the amount of total repayments, $155 million was made during the three months ended March 31, 2009, in advance of the scheduled amortization.

     All obligations under the senior unsecured credit facility are guaranteed by substantially all of the Company’s existing and future direct and indirect domestic subsidiaries.

     The senior unsecured credit facility contains customary negative covenants that, among other things, restrict the Company’s ability to incur debt at subsidiaries that are not guarantors; incur liens; merge or sell, transfer, lease or otherwise dispose of all or substantially all assets; make investments, loans, advances, guarantees and acquisitions; enter into transactions with affiliates; and enter into agreements restricting its ability to incur liens or the ability of subsidiaries to make distributions. These covenants are subject to certain exceptions described in the senior credit agreement. In addition, the senior unsecured credit facility requires the Company to comply with a maximum total leverage ratio covenant and a minimum interest coverage ratio covenant, as defined in the senior credit agreement. The senior unsecured credit facility also contains certain usual and customary representations and warranties, affirmative covenants and events of default. As of March 31, 2009 and December 31, 2008, the Company was in compliance with all covenant requirements. 

     No amounts were outstanding under the senior unsecured credit facility during the three months ended March 31, 2008.

     The Company had $1.7 billion aggregate principal amount of senior unsecured notes outstanding as of March 31, 2009, consisting of $250 million aggregate principal amount of 6.12% senior notes due 2013, $1.2 billion aggregate principal amount of 6.82% senior notes due 2018, and $250 million aggregate principal amount of 7.45% senior notes due 2038. The weighted average interest cost of the senior notes is 6.8%. Interest on the senior unsecured notes is payable semi-annually on May 1 and November 1 and is subject to increase if either of two rating agencies downgrades the debt rating associated with the notes. Interest expense was $29 million for the three months ended March 31, 2009, including amortization of deferred financing costs of less than $1 million.

     The indenture governing the notes, among other things, limits the Company’s ability to incur indebtedness secured by principal properties, to enter into certain sale and lease back transactions and to enter into certain mergers or transfers of substantially all of DPS’ assets. The notes are guaranteed by substantially all of the Company’s existing and future direct and indirect domestic subsidiaries. 

     No amounts were outstanding under the senior unsecured notes during the three months ended March 31, 2008.

   Capital Lease Obligations

     Long-term capital lease obligations totaled $16 million and $17 million as of March 31, 2009, and December 31, 2008, respectively. Current obligations related to the Company’s capital leases were $2 million as of March 31, 2009, and December 31, 2008, and were included as a component of accounts payable and accrued expenses.

     The table below details the components of other non-current assets and other non-current liabilities as of March 31, 2009, and December 31, 2008 (in millions):

     The effective tax rates for the three months ended March 31, 2009 and 2008 were 38.3% and 38.7%, respectively. The decrease in the effective tax rate for the three months ended March 31, 2009, was primarily driven by the realization of tax planning benefits, offset by a deferred tax charge driven by a change of state law effective in the period and higher separation related charges indemnified under the Tax Indemnity Agreement entered into with Cadbury at separation.

     The Company’s Canadian deferred tax assets include a separation related balance of $131 million that is offset by a liability due to Cadbury of $105 million driven by the Tax Indemnity Agreement. Anticipated legislation in Canada could result in a future partial write down of the deferred tax asset which would be offset to some extent by a partial write down of the liability due to Cadbury.

     Under the Tax Indemnity Agreement, Cadbury has agreed to indemnify DPS for net unrecognized tax benefits and other tax related items of $389 million. This balance increased by $3 million during the current period and was offset by indemnity income recorded as a component of other income in the unaudited Condensed Consolidated Statement of Operations. In addition, pursuant to the terms of the Tax Indemnity Agreement, if DPS breaches certain covenants or other obligations or DPS is involved in certain change-in-control transactions, Cadbury may not be required to indemnify the Company.

     The Company implements restructuring programs from time to time that are designed to improve operating effectiveness and lower costs. When the Company implements these programs, it incurs various charges, including severance and other employment related costs.

     The Company did not incur any restructuring charges during the three months ended March 31, 2009. Restructuring charges incurred during the three months ended March 31, 2008 were as follows (in millions):

     The Company does not expect to incur additional non-recurring charges during the remainder of 2009 with respect to the restructuring programs listed above.

     Restructuring liabilities are included in accounts payable and accrued expenses on the unaudited Condensed Consolidated Balance Sheets. Restructuring liabilities as of March 31, 2009, and December 31, 2008, along with charges to expense, cash payments and non-cash charges for the three months ended March 31, 2009, were as follows (in millions):

     Organizational Restructuring

     The Company initiated a restructuring program in the fourth quarter of 2007 intended to create a more efficient organization which resulted in the reduction of employees in the Company’s corporate, sales and supply chain functions. The Company did not incur any restructuring charges related to the organizational restructuring during the three months ended March 31, 2009. The table below summarizes the charges for the three months ended March 31, 2008 and the cumulative costs to date by operating segment (in millions). The Company does not expect to incur additional restructuring charges related to the organizational restructuring.

   Integration of the Direct Store Delivery Business

     In conjunction with the formation of the Direct Store Delivery (“DSD”) business in 2006, the Company began the standardization of processes within the DSD business and integration of the DSD business with the other operations of the Company. The Company did not incur any restructuring charges related to the integration of the DSD business during the three months ended March 31, 2009. The table below summarizes the charges for the three months ended March 31, 2008 and the cumulative costs to date by operating segment (in millions). The Company does not expect to incur additional restructuring charges related to the integration of the DSD business.

   Integration of Technology Facilities

     In 2007, the Company began a program to integrate its technology facilities. The Company did not incur any charges for the integration of technology facilities for the three months ended March 31, 2009, and charges were $1 million for the three months ended March 31, 2008. The Company has incurred $11 million through March 31, 2009, and does not expect to incur additional restructuring charges related to the integration of technology facilities.

   Facility Closure

     The Company closed a facility related to the Packaged Beverages segment’s operations in 2007. No charges were incurred relating to the facility closure for the three months ended March 31, 2009, and charges were $1 million for the three months ended March 31, 2008. The Company does not expect to incur additional restructuring charges related to this facility closure.

     The following tables set forth the components of pension benefit costs for the three months ended March 31, 2009 and 2008 (in millions):

     Total net periodic benefit costs for the U.S. postretirement benefit plans were less than $1 million for the three months ended March 31, 2009 and 2008. The estimated prior service cost, transitional obligation and estimated net loss that will be amortized from accumulated other comprehensive loss into periodic benefit cost for postretirement plans in 2009 are each less than $1 million. Additionally, contributions paid into multi-employer defined benefit pension plans for employees under collective bargaining agreements were approximately $1 million each for the three months ended March 31, 2009 and 2008.

     The Company contributed $23 million to its pension plans during the three months ended March 31, 2009, and expects to contribute an additional $18 million to these plans during the remainder of 2009.

     The components of stock-based compensation expense for the three months ended March 31, 2009 and 2008 are presented below (in millions). Stock-based compensation expense was recorded in selling, general and administrative expenses in the unaudited Condensed Consolidated Statement of Operations.

     The Company’s Omnibus Stock Incentive Plan of 2008 (the “2008 Stock Plan”) provides for various long-term incentive awards, including stock options and restricted stock units (“RSUs”).

     The table below summarizes stock option activity for the three months ended March 31, 2009.

     As of March 31, 2009, there was $9 million of unrecognized compensation cost related to the nonvested stock options granted under the 2008 Stock Plan that is expected to be recognized over a weighted-average period of 2.45 years.

     The table below summarizes RSU activity for the three months ended March 31, 2009.

     As of March 31, 2009, there was $37 million of unrecognized compensation cost related to the nonvested RSUs granted under the 2008 Stock Plan that is expected to be recognized over a weighted-average period of 2.58 years.

     Basic earnings per share (“EPS”) is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the assumed conversion of all dilutive securities. The following table sets forth the computation of basic EPS utilizing the net income for the respective period and the Company’s basic shares outstanding and presents the computation of diluted EPS (in millions, except per share data):

     DPS is exposed to market risks arising from adverse changes in:

     The Company manages these risks through a variety of strategies, including the use of interest rate swaps, foreign exchange forward contracts, commodity futures contracts and supplier pricing agreements.

     The Company formally designates and accounts for interest rate swaps and foreign exchange forward contracts that meet established accounting criteria under SFAS 133 as cash flow hedges. DPS assesses hedge effectiveness and measures hedge ineffectiveness at least quarterly throughout the designated period. The effective portion of the gain or loss on the derivative instruments is recorded, net of applicable taxes, in Accumulated Other Comprehensive Income (“AOCI”), a component of Stockholders’ Equity in the unaudited Condensed Consolidated Balance Sheets. When net income is affected by the variability of the underlying transaction, the applicable offsetting amount of the gain or loss from the derivative instruments deferred in AOCI is reclassified to net income and is reported as a component of the unaudited Condensed Consolidated Statements of Operations. Changes in the fair value of the derivative instruments that do not effectively offset changes in the fair value of the underlying hedged item throughout the designated hedge period (“ineffectiveness”) are recorded in net income each period.

          Interest Rates

     DPS manages its exposure to volatility in floating interest rates on borrowings under its senior unsecured credit facility through the use of interest rate swaps that convert variable interest rates to fixed rates. The intent of entering into interest rate swaps is to provide predictability in the Company’s overall cost structure. During the three months ended March 31, 2009, the Company fully settled an interest rate swap with a notional amount of $500 million and maintained another interest rate swap, with a notional amount of $1.2 billion with a maturity date of December 31, 2009. In February 2009, the Company entered into an interest rate swap effective December 31, 2009, with a duration of twelve months and a $750 million notional amount that amortizes at the rate of $100 million every quarter. There were no interest rate swaps in place for the three months ended March 31, 2008, that qualified for hedge accounting under SFAS 133.

   Foreign Exchange

     The Company’s Canadian business purchases its inventory through transactions denominated and settled in U.S. Dollars, a currency different from the functional currency of the Canadian business. These inventory purchases and settlements are subject to exposure from movements in exchange rates. The Company uses foreign exchange forward contracts to hedge operational exposures resulting from changes in these foreign currency exchange rates. The intent of the 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 twelve months. As of March 31, 2009, the Company had outstanding foreign exchange forward contracts with notional amounts of $19 million. There were no hedge instruments in place for the three months ended March 31, 2008, that qualified for hedge accounting under SFAS 133.

          Commodities

     DPS centrally manages the exposure to volatility in the prices of certain commodities used in its production process through futures contracts and supplier pricing agreements. The intent of contracts and agreements is to provide predictability in the Company’s overall cost structure. The Company enters into futures contracts that economically hedge certain of its risks, although hedge accounting under SFAS 133 may not apply. In these cases, there exists a natural hedging relationship in which changes in the fair value of the instruments act as an economic offset to changes in the fair value of the underlying item(s). Changes in the fair value of these instruments are recorded in net income throughout the term of the derivative instrument and are reported in the same line item of the unaudited Condensed Consolidated Statements of Operations as the hedged transaction. Gains and losses are recognized as a component of unallocated corporate costs until the Company’s operating segments are affected by the completion of the underlying transaction, at which time the gain or loss is reflected as a component of the respective segment’s operating profit.

     The following table summarizes the location of the fair value of the Company’s derivative instruments within the unaudited Condensed Consolidated Balance Sheets as of March 31, 2009, and December 31, 2008 (in millions):

     The following table presents the impact of derivative instruments designated as cash flow hedging instruments under SFAS 133 to the unaudited Condensed Consolidated Statement of Operations and Other Comprehensive Income (“OCI”) for the three months ended March 31, 2009 (in millions):

     Hedge ineffectiveness recognized in net income for the three months ended March 31, 2009, was less than $1 million. During the next twelve months, the Company expects to reclassify net losses of $24 million related to interest rate swaps from AOCI into net income.

     The following table presents the impact of derivative instruments not designated as hedging instruments under SFAS 133 to the unaudited Condensed Consolidated Statement of Operations for the three months ended March 31, 2009 (in millions):

     For more information on the valuation of derivative instruments, see Note 13. 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.

     In accordance with SFAS 157, the Company defines fair value 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. SFAS 157 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:

     The following table presents the fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of March 31, 2009 (in millions):

  Legal Matters

     The Company is occasionally subject to litigation or other legal proceedings. Set forth below is a description of the Company’s significant pending legal matters. Although the estimated range of loss, if any, for the pending legal matters described below cannot be estimated at this time, the Company does not believe that the outcome of these, or any other, pending legal matters, individually or collectively, will have a material adverse effect on the business or financial condition of the Company although such matters may have a material adverse effect on the Company’s results of operations or cash flows in a particular period.

  Snapple Distributor Litigation

     In 2004, one of the Company’s subsidiaries, Snapple Beverage Corp., and several affiliated entities of Snapple Beverage Corp., including Snapple Distributors Inc., were sued in United States District Court, Southern District of New York, by 57 area route distributors for alleged price discrimination, breach of contract, retaliation, tortious interference and breach of the implied duty of good faith and fair dealings arising out of their respective area route distributor agreements. Each plaintiff sought damages in excess of $225 million. The plaintiffs initially filed the case as a class action but withdrew their class certification motion. They proceeded as individual plaintiffs but the cases were consolidated for discovery and procedural purposes. On September 14, 2007, the court granted the Company’s motion for summary judgment, dismissing the plaintiffs’ federal claims of price discrimination and dismissing, without prejudice, the plaintiffs’ remaining claims under state law. The plaintiffs filed an appeal of the decision and both parties have filed appellate briefs and are awaiting the court’s decision. Also, the plaintiffs may decide to re-file the state law claims in state court.

The Company believes it has meritorious defenses with respect to the appeal and will defend itself vigorously. However, there is no assurance that the outcome of the appeal, or any trial, if claims are refiled, will be in the Company’s favor.

     Snapple Litigation — Labeling Claims

     In 2007, Snapple Beverage Corp. was sued by Stacy Holk in New Jersey Superior Court, Monmouth County. The Holk case was filed as a class action. Subsequent to filing, the Holk case was removed to the United States District Court, District of New Jersey. Holk alleges that Snapple’s labeling of certain of its drinks is misleading and/or deceptive and seeks unspecified damages on behalf of the class, including enjoining Snapple from various labeling practices, disgorging profits, reimbursing of monies paid for product and treble damages. Snapple filed a motion to dismiss the Holk case on a variety of grounds. On June 12, 2008, the district court granted Snapple’s motion to dismiss and the Holk case was dismissed. The plaintiff has filed an appeal of the order dismissing the case which is pending a hearing and decision by the court. In 2007 the attorneys in the Holk case also filed a new action in New York on behalf of plaintiff, Evan Weiner, with substantially the same allegations and seeking the same damages as in the Holk case. The Company has filed a motion to dismiss the Weiner case on a variety of grounds. The Weiner case is currently stayed pending the outcome of the Holk case. In April 2009, Snapple Beverage Corp. was sued by Frances Von Koenig in United States District Court for the Eastern District of California as a class action with similar allegations to the Holk case and seeking similar damages. The Company believes it has meritorious defenses to the claims asserted in each of these cases and will defend itself vigorously. However, there is no assurance that the outcome of these cases will be favorable to the Company.

     In 2007, one of the Company’s subsidiaries, Seven Up/RC Bottling Company Inc., was sued by Nicolas Steele, and in a separate action by Robert Jones, in each case in Superior Court in the State of California (Orange County), alleging that its subsidiary failed to provide meal and rest periods and itemized wage statements in accordance with applicable California wage and hour law. The cases were filed as class actions. The classes, which have not yet been certified, consist of employees who have held a merchandiser or delivery driver position in California in the past three years. The potential class size could be substantially higher due to the number of individuals who have held these positions over the three year period. On behalf of the classes, the plaintiffs claim lost wages, waiting time penalties and other penalties for each violation of the statute. In the Steele case, plaintiff’s counsel and the Company have reached an agreement to settle the case that is not material to the Company. This settlement is subject to review and approval by the court. With respect to the Jones case, the Company believes it has meritorious defenses to the claims asserted and will defend itself vigorously. However, there is no assurance that the outcome of this matter will be in its favor.

     The Company has been requested to conduct an audit of its meal and rest periods for all non-exempt employees in California at the direction of the California Department of Labor. At this time, the Company has declined to conduct such an audit until there is judicial clarification of the intent of the statute. The Company cannot predict the outcome of such an audit.

  Environmental, Health and Safety Matters

     The Company operates many manufacturing, bottling and distribution facilities. In these and other aspects of the Company’s business, it is subject to a variety of federal, state and local environment, health and safety laws and regulations. The Company maintains environmental, health and safety policies and a quality, environmental, health and safety program designed to ensure compliance with applicable laws and regulations. However, the nature of the Company’s business exposes it to the risk of claims with respect to environmental, health and safety matters, and there can be no assurance that material costs or liabilities will not be incurred in connection with such claims. However, the Company is not currently named as a party in any judicial or administrative proceeding relating to environmental, health and safety matters which would materially affect its operations.

  Compliance Matters

     The Company is currently undergoing state audits for the years 1981 through 2008, spanning nine states and seven of the Company’s entities within the Packaged Beverages segment. The Company has accrued an estimated liability based on the current facts and circumstances. However, there is no assurance of the outcome of the audits.

     The Company presents segment information in accordance with SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, which established reporting and disclosure standards for an enterprise’s operating segments. Operating segments are defined as components of an enterprise that are businesses, for which separate financial information is available, and for which the financial information is regularly reviewed by the company’s chief executive officer.

     Effective January 1, 2009, the Company modified its internal reporting and operating segments to better reflect its business structure and to provide greater clarity and transparency. Accordingly, the operating segments reported within this Quarterly Report on Form 10-Q reflect the changes to the internal reporting structure and operating segments.

     The Company’s operating structure consisted of the following three operating segments as of March 31, 2009:

     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.

     Information about the Company’s operations by operating segment for the three months ended March 31, 2009 and 2008 is as follows
(in millions):

  Allocated Expenses

     Prior to the Company’s separation from Cadbury, Cadbury allocated certain costs to the Company, including costs for certain corporate functions provided for the Company by Cadbury. These allocations were based on the most relevant allocation method for the services provided. To the extent expenses were paid by Cadbury on behalf of the Company, they were allocated based upon the direct costs incurred. Where specific identification of expenses was not practicable, the costs of such services were allocated based upon the most relevant allocation method to the services provided, primarily either as a percentage of net sales or headcount of the Company. The Company was allocated $6 million of costs for the three months ended March 31, 2008. Post separation, there were no expenses allocated to DPS from Cadbury.

  Cash Management

     Prior to separation, the Company’s cash was available for use and was regularly swept by Cadbury operations in the United States at Cadbury’s discretion. Cadbury also funded the Company’s operating and investing activities as needed. Following the separation, the Company has funded its liquidity needs from cash flow from operations.

  Interest Expense and Interest Income

     The Company recorded interest expense of $49 million for the three months ended March 31, 2008, related to interest bearing related party debt with other wholly-owned subsidiaries of Cadbury that were unrelated to the Company’s business.

     The Company recorded $15 million of interest income for the three months ended March 31, 2008, related to a note receivable balance with wholly-owned subsidiaries of Cadbury.

     Upon the Company’s separation from Cadbury, the Company settled outstanding receivable, debt and payable balances with Cadbury except for amounts due under the Separation and Distribution Agreement, Transition Services Agreement, Tax Indemnity Agreement, and Employee Matters Agreement.

     The Company’s 6.12% senior notes due 2013, 6.82% senior notes due 2018 and 7.45% senior notes due 2038 (the “notes”) are fully and unconditionally guaranteed by substantially all of the Company’s existing and future direct and indirect domestic subsidiaries (except two immaterial subsidiaries associated with the Company’s charitable foundations) (the “guarantors”), as defined in the indenture governing the notes. The guarantors are wholly-owned either directly or indirectly by the Company and jointly and severally guarantee the Company’s obligations under the notes. None of the Company’s subsidiaries organized outside of the United States guarantee the notes. 

     The following schedules present the guarantor and non-guarantor information for the three months ended March 31, 2009 and 2008, and as of March 31, 2009, and December 31, 2008. The consolidating schedules are provided in accordance with the reporting requirements for guarantor subsidiaries.

     On May 7, 2008, Cadbury transferred its Americas Beverages business to Dr Pepper Snapple Group, Inc., which became an independent publicly-traded company. Prior to the transfer, Dr Pepper Snapple Group, Inc. did not have any operations. Accordingly, activity for Dr Pepper Snapple Group, Inc. (the “parent”) is reflected in the consolidating statements from May 7, 2008 forward.