Snapple 2008 Annual Report Download - page 52

Gross Profit
Gross profit remained flat for 2008 compared with the prior year. Increased pricing largely offset the decrease
in sales volumes, increased customer discounts and increased commodity costs across our segments. Gross profit
for the year ended December 31, 2008, includes LIFO expense of $20 million, compared to $6 million in 2007.
LIFO is an inventory costing method that assumes the most recent goods manufactured are sold first, which in
periods of rising prices results in an expense that eliminates inflationary profits from net income. Gross margin was
55% for the years ended December 31, 2008 and 2007.
(Loss) Income from Operations
The $1,172 million decrease in income from operations for 2008 compared with 2007 was primarily driven by
impairment charges of $1,039 million in 2008, a one time gain we recognized in 2007 of $71 million in connection
with the termination of the glaceau distribution agreement and higher selling, general and administrative (“SG&A”)
expenses in 2008, partially offset by lower restructuring costs.
Our annual impairment analysis, performed as of December 31, 2008, resulted in non-cash impairment charges
of $1,039 million for 2008. The pre-tax charges consisted of $278 million related to the Snapple brand, $581 related
to the Bottling Group’s distribution rights and $180 million related to the Bottling Group’s goodwill. Deteriorating
economic and market conditions in the fourth quarter triggered higher discount rates as well as lower volume and
growth projections which drove these impairments. Indicative of the economic and market conditions, our average
stock price declined 19% in the fourth quarter as compared to the average stock price from May 7, 2008, the date of
our separation from Cadbury, through September 30, 2008. The impairment of the distribution rights was attributed
to insufficient net economic returns above working capital, fixed assets and assembled workforce.
SG&A expenses increased for 2008 primarily due to separation related costs, higher transportation costs and
increased payroll and payroll related costs. In connection with our separation from Cadbury, we incurred transaction
costs and other one time costs of $33 million for 2008. We incurred higher transportation costs principally due to an
increase of $22 million related to higher fuel prices. These increases were partially offset by benefits from
restructuring initiatives announced in 2007, lower marketing costs and $12 million in lower stock-based com-
pensation expense.
Restructuring costs of $57 million and $76 million for 2008 and 2007, respectively, were primarily due to a
plan announced in October 2007 intended to create a more efficient organization that resulted in the reduction of
employees in the Company’s corporate, sales and supply chain functions and the continued integration of our
Bottling Group into existing businesses. Restructuring costs for 2007 were higher due to higher costs associated
with the organizational restructuring as well as additional costs recognized for the integration of technology
facilities and the closure of a facility.
The loss of the glaceau distribution agreement reduced 2008 income from operations by $40 million,
excluding the one time gain from the payment we received on termination.
Interest Expense, Interest Income and Other Income
Interest expense increased $4 million reflecting our capital structure as a stand-alone company, principally
relating to our term loan A and unsecured notes. Interest expense for 2008 contained $26 million related to our
bridge loan facility, including $21 million of financing fees expensed when the bridge loan facility was terminated.
In 2008, we incurred $160 million less interest expense related to debt owed to Cadbury and $19 million related to
third party debt settlement.
The $32 million decrease in interest income was primarily due to the loss of interest income earned on note
receivable balances with subsidiaries of Cadbury, partially offset as we earned interest income on the funds from the
bridge loan facility and other cash balances.
Other income of $18 million in 2008 primarily related to indemnity income associated with the Tax Indemnity
Agreement with Cadbury.
Provision for Income Taxes
The effective tax rates for 2008 and 2007 were 16.3% and 39.4%, respectively. The 2008 tax rate reflects that
the tax benefit provided on the 2008 impairment charge is at an effective rate lower than our statutory rate primarily
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