Keurig Green Mountain, Inc.
GREEN MOUNTAIN COFFEE ROASTERS INC (Form: 10-Q, Received: 02/01/2012 16:33:54)

 

 

FORM 10-Q

 

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

(Mark One)

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

 

For the thirteen weeks ended December 24, 2011

 

OR

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

 

For the transition period from                   to                 

 

Commission file number 1-12340

 

GREEN MOUNTAIN COFFEE ROASTERS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

03-0339228

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

33 Coffee Lane, Waterbury, Vermont  05676

(Address of principal executive offices)  (zip code)

 

(802) 244-5621

(Registrants’ telephone number, including area code)

 

 

(Former name, former address and former fiscal year, if changed since last report.)

 

Indicate by check mark whether the registrant has (1) 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 x NO o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES x 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.

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller Reporting Company o

 

Indicate by check mark whether the Registrant is a shell company (as defined in rule 12b-2 of the Exchange Act) YES o NO x

 

As of January 26, 2012, 154,854,881 shares of common stock of the registrant were outstanding.

 

 

 



 

Part I.  Financial Information

Item 1.  Financial Statements

 

GREEN MOUNTAIN COFFEE ROASTERS, INC.
Unaudited Consolidated Balance Sheets
(Dollars in thousands)

 

 

 

December 24,
2011

 

September 24,
2011

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

84,111

 

$

12,989

 

Restricted cash and cash equivalents

 

9,087

 

27,523

 

Receivables, less uncollectible accounts and return allowances of $58,956 and $21,407 at December 24, 2011 and September 24, 2011, respectively

 

412,464

 

310,321

 

Inventories

 

606,679

 

672,248

 

Income taxes receivable

 

1,645

 

18,258

 

Other current assets

 

33,848

 

28,072

 

Deferred income taxes, net

 

35,675

 

36,231

 

Current assets held for sale

 

 

25,885

 

Total current assets

 

1,183,509

 

1,131,527

 

 

 

 

 

 

 

Fixed assets, net

 

674,764

 

579,219

 

Intangibles, net

 

520,820

 

529,494

 

Goodwill

 

792,700

 

789,305

 

Other long-term assets

 

46,464

 

47,759

 

Long-term assets held for sale

 

 

120,583

 

 

 

 

 

 

 

Total assets

 

$

3,218,257

 

$

3,197,887

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Current portion of long-term debt

 

$

8,343

 

$

6,669

 

Accounts payable

 

247,505

 

265,511

 

Accrued compensation costs

 

29,744

 

43,260

 

Accrued expenses

 

133,710

 

92,120

 

Income tax payable

 

39,081

 

9,617

 

Deferred income taxes, net

 

245

 

243

 

Other current liabilities

 

33,064

 

34,613

 

Current liabilities related to assets held for sale

 

 

19,341

 

Total current liabilities

 

491,692

 

471,374

 

 

 

 

 

 

 

Long-term debt

 

471,344

 

575,969

 

Deferred income taxes, net

 

196,049

 

189,637

 

Other long-term liabilities

 

18,082

 

27,184

 

Long-term liabilities related to assets held for sale

 

 

474

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Redeemable noncontrolling interests

 

10,908

 

21,034

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Preferred stock, $0.10 par value: Authorized - 1,000,000 shares; No shares issued or outstanding

 

 

 

Common stock, $0.10 par value: Authorized - 200,000,000 shares; Issued and outstanding - 154,769,830 and 154,466,463 shares at December 24, 2011 and September 24, 2011, respectively

 

15,477

 

15,447

 

Additional paid-in capital

 

1,507,912

 

1,499,616

 

Retained earnings

 

516,247

 

411,727

 

Accumulated other comprehensive loss

 

(9,454

)

(14,575

)

Total stockholders’ equity

 

$

2,030,182

 

$

1,912,215

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

3,218,257

 

$

3,197,887

 

 

The accompanying Notes to the Unaudited Consolidated Financial Statements are an integral part of these interim financial statements.

 

1



 

GREEN MOUNTAIN COFFEE ROASTERS, INC.
Unaudited Consolidated Statements of Operations
(Dollars in thousands except per share data)

 

 

 

Thirteen
weeks ended
December 24,
2011

 

Thirteen
weeks ended
December 25,
2010

 

Net sales

 

$

1,158,216

 

$

574,148

 

Cost of sales

 

821,612

 

430,548

 

Gross profit

 

336,604

 

143,600

 

 

 

 

 

 

 

Selling and operating expenses

 

141,358

 

78,289

 

General and administrative expenses

 

49,408

 

42,031

 

Operating income

 

145,838

 

23,280

 

 

 

 

 

 

 

Other income (expense), net

 

691

 

88

 

Loss on financial instruments, net

 

(1,134

)

(6,342

)

Gain on foreign currency, net

 

2,686

 

1,579

 

Gain on sale of subsidiary

 

26,311

 

 

Interest expense

 

(6,463

)

(6,058

)

Income before income taxes

 

167,929

 

12,547

 

 

 

 

 

 

 

Income tax expense

 

(63,247

)

(10,098

)

Net Income

 

$

104,682

 

$

2,449

 

 

 

 

 

 

 

Net income attributable to noncontrolling interests

 

268

 

37

 

 

 

 

 

 

 

Net income attributable to GMCR

 

$

104,414

 

$

2,412

 

 

 

 

 

 

 

Basic income per share:

 

 

 

 

 

Basic weighted average shares outstanding

 

154,704,471

 

141,374,327

 

Net income per common share - basic

 

$

0.67

 

$

0.02

 

 

 

 

 

 

 

Diluted income per share:

 

 

 

 

 

Diluted weighted average shares outstanding

 

159,367,829

 

147,036,072

 

Net income per common share - diluted

 

$

0.66

 

$

0.02

 

 

The accompanying Notes to the Unaudited Consolidated Financial Statements are an integral part of these interim financial statements.

 

2



 

GREEN MOUNTAIN COFFEE ROASTERS, INC.
Unaudited Consolidated Statements of Comprehensive Income
(Dollars in thousands)

 

 

 

Thirteen
weeks ended
December 24,
2011

 

Thirteen
weeks ended
December 25,
2010

 

Net income

 

$

104,682

 

$

2,449

 

Other comprehensive income, net of tax:

 

 

 

 

 

Deferred gain on derivatives designated as cash flow hedges, net of tax provision of $0.5 million and $0.3 million, respectively

 

674

 

385

 

Loss on derivatives designated as cash flow hedges reclassified to net income, net of tax benefit of $0.1 million

 

148

 

 

Foreign currency translation adjustment

 

4,391

 

3,196

 

Other comprehensive gain

 

5,213

 

3,581

 

Total comprehensive income

 

109,895

 

6,030

 

Total comprehensive income attributable to redeemable noncontrolling interests, net of tax

 

360

 

98

 

Total comprehensive income attributable to GMCR

 

$

109,535

 

$

5,932

 

 

The accompanying Notes to the Unaudited Consolidated Financial Statements are an integral part of these interim financial statements.

 

3



 

GREEN MOUNTAIN COFFEE ROASTERS, INC.

Unaudited Consolidated Statement Of Changes In Redeemable Noncontrolling Interests And Stockholders’ Equity

For the Period Ended December 24, 2011 (Dollars in thousands)

 

 

 

Equity Attributable

 

 

 

 

 

 

Additional

 

 

 

Accumulated

 

 

 

 

 

to Redeemable

 

 

Common stock

 

paid-in

 

Retained

 

other 

 

Stockholders’

 

 

 

Noncontrolling Interests

 

 

Shares

 

Amount

 

capital

 

earnings

 

comprehensive loss

 

Equity

 

Balance at September 24, 2011

 

$

21,034

 

 

154,466,463

 

$

15,447

 

$

1,499,616

 

$

411,727

 

$

(14,575

)

$

1,912,215

 

Options exercised

 

 

 

303,367

 

30

 

781

 

 

 

811

 

Stock compensation expense

 

 

 

 

 

3,516

 

 

 

3,516

 

Tax benefit from exercise of options

 

 

 

 

 

3,909

 

 

 

3,909

 

Deferred compensation expense

 

 

 

 

 

90

 

 

 

90

 

Disposition of noncontrolling interests

 

(10,331

)

 

 

 

 

 

 

 

Adjustment of redeemable noncontrolling interests to redemption value

 

(106

)

 

 

 

 

106

 

 

106

 

Cash distributions

 

(49

)

 

 

 

 

 

 

 

Other comprehensive income, net of tax

 

92

 

 

 

 

 

 

5,121

 

5,121

 

Net income

 

268

 

 

 

 

 

104,414

 

 

104,414

 

Balance at December 24, 2011

 

$

10,908

 

 

154,769,830

 

$

15,477

 

$

1,507,912

 

$

516,247

 

$

(9,454

)

$

2,030,182

 

 

The accompanying Notes to the Unaudited Consolidated Financial Statements are an integral part of these interim financial statements.

 

4


 


 

GREEN MOUNTAIN COFFEE ROASTERS, INC.

Unaudited Consolidated Statements of Cash Flows

(Dollars in thousands)

 

 

 

Thirteen

 

Thirteen

 

 

 

weeks ended

 

weeks ended

 

 

 

December 24,

 

December 25,

 

 

 

2011

 

2010

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

104,682

 

$

2,449

 

Adjustments to reconcile net income to net cash (used in) provided by operating activities:

 

 

 

 

 

Depreciation

 

25,611

 

11,995

 

Amortization of intangibles

 

11,453

 

6,136

 

Amortization deferred financing fees

 

1,513

 

409

 

Loss on extinguishment of debt

 

 

2,555

 

Unrealized gain of foreign currency

 

(2,050

)

(1,473

)

Loss on disposal of fixed assets

 

232

 

34

 

Gain on sale of subsidiary

 

(26,311

)

 

Provision for doubtful accounts

 

1,422

 

384

 

Provision for sales returns

 

54,630

 

27,521

 

Unrealized loss on financial instruments, net

 

1,383

 

3,148

 

Excess tax benefits from equity-based compensation plans

 

(3,908

)

(914

)

Deferred income taxes

 

5,636

 

2,487

 

Deferred compensation and stock compensation

 

3,606

 

2,261

 

Changes in assets and liabilities, net of effects of acquisition:

 

 

 

 

 

Receivables

 

(155,553

)

(52,099

)

Inventories

 

67,048

 

30,030

 

Income tax receivable/payable, net

 

49,953

 

6,637

 

Other current assets

 

(5,952

)

2,183

 

Other long-term assets, net

 

(365

)

(16,615

)

Accounts payable

 

(25,535

)

2,335

 

Accrued compensation costs

 

(13,295

)

(15,257

)

Accrued expenses

 

40,868

 

20,937

 

Other current liabilities

 

(144

)

(2,045

)

Other long-term liabilities

 

(225

)

16,631

 

Net cash provided by operating activities

 

134,699

 

49,729

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Change in restricted cash

 

581

 

117

 

Proceeds from notes receivable

 

202

 

42

 

Acquisition of LJVH Holdings, Inc. (Van Houtte), net of cash acquired

 

 

(907,835

)

Proceeds from sale of subsidiary, net of cash transferred

 

142,566

 

 

Capital expenditures for fixed assets

 

(101,848

)

(47,506

)

Proceeds from disposal of fixed assets

 

166

 

21

 

Net cash provided by (used in) investing activities

 

41,667

 

(955,161

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Net change in revolving line of credit

 

(113,074

)

288,095

 

Proceeds from issuance of common stock under compensation plans

 

811

 

411

 

Proceeds from issuance of common stock for private placement

 

 

249,524

 

Cash distributions to redeemable noncontrolling interests shareholders

 

(49

)

 

Excess tax benefits from equity-based compensation plans

 

3,908

 

914

 

Principal payments under capital lease obligations

 

(622

)

(2

)

Proceeds from borrowings of long-term debt

 

 

794,500

 

Deferred financing fees

 

 

(41,438

)

Repayment of long-term debt

 

(1,616

)

(354,544

)

Net cash (used in) provided by financing activities

 

(110,642

)

937,460

 

 

 

 

 

 

 

Change in cash balances included in current assets held for sale

 

5,160

 

(3,638

)

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

238

 

162

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

71,122

 

28,552

 

Cash and cash equivalents at beginning of period

 

12,989

 

4,401

 

Cash and cash equivalents at end of period

 

$

84,111

 

$

32,953

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

Fixed asset purchases included in accounts payable and not disbursed at the end of each year

 

$

33,463

 

$

11,676

 

 

 

 

 

 

 

Non cash financing and investing activities:

 

 

 

 

 

Equipment acquired under capital lease obligations/vendor notes

 

$

10,974

 

$

 

 

The accompanying Notes to the Unaudited Consolidated Financial Statements are an integral part of these interim financial statements.

 

5



 

Green Mountain Coffee Roasters, Inc.

Notes to Unaudited Consolidated Financial Statements

 

1.               Basis of Presentation

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information, the instructions to Form 10-Q, and Rule 10-01 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete consolidated financial statements.

 

In the opinion of management, all adjustments considered necessary for a fair presentation of the interim financial data have been included.  Results from operations for the thirteen week period ended December 24, 2011 are not necessarily indicative of the results that may be expected for the fiscal year ending September 29, 2012.

 

The September 24, 2011 balance sheet data was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America. For further information, refer to the consolidated financial statements and the footnotes included in the Annual Report on Form 10-K for Green Mountain Coffee Roasters, Inc. for the fiscal year ended September 24, 2011. Throughout this presentation, we refer to the consolidated company as the “Company” and, unless otherwise noted, the information provided is on a consolidated basis.

 

The Company has revised the classification of certain information presented in its fiscal 2011 audited consolidated financial statements to conform to its fiscal 2012 presentation.

 

The Unaudited Consolidated Statements of Operations, Comprehensive Income and Cash Flows for the thirteen weeks ended December 25, 2010 have been retrospectively adjusted for the finalization of the Van Houtte valuation and purchase price allocation.

 

The Company has revised its presentation of the line items for gains and losses on foreign currency and gains and losses on financial instruments in the cash flows from operating activities section of the Unaudited Consolidated Statement of Cash Flows.  In the Company’s Form 10-Q for the thirteen weeks ended December 25, 2010 (the “Q1’11 Form 10-Q”), the Company reported both realized and unrealized gains and losses on foreign currency transactions and financial instruments to reconcile net income to net cash provided by operating activities.  As previously disclosed, only unrealized gains and losses should be reflected as an adjustment to reconcile net income to net cash provided by operating activities.  The adjustment for realized gains and losses resulted in a corresponding adjustment to changes in working capital items; accounts payable, other current assets and other current liabilities. The changes in presentation had no impact on consolidated net cash provided by operating activities.

 

In addition, in the Unaudited Consolidated Statement of Cash Flows, the Company revised the presentation of the write-off of $2.6 million in deferred financing fees related to the extinguishment of debt on its former credit facility, which was previously classified in the line item Amortization of deferred financing fees in the Q1’11 Form 10-Q to the line item Loss on extinguishment of debt to be consistent with the current presentation. The change in presentation had no impact on net cash provided by operating activities.

 

6



 

2.     Acquisitions and Divestitures

 

Fiscal Year 2012

 

On October 3, 2011, all the outstanding shares of Van Houtte USA Holdings, Inc., also known as the Van Houtte U.S. Coffee Service business or “Filterfresh” business were sold to ARAMARK Refreshment Services, LLC (“ARAMARK”) in exchange for $149.6 million in cash. Approximately $4.4 million of cash was transferred to ARAMARK as part of the sale, resulting in a net cash inflow related to the Filterfresh sale of $142.6 million, net of transaction costs of $2.6 million.  The purchase agreement contained a covenant whereby the Company was required to re-pay a portion of the proceeds received from ARAMARK in the event of certain conditions. Subsequent to December 24, 2011, the contingency was settled under which the Company paid ARAMARK $7.4 million, which adjusted the purchase price to $142.2 million. The Company recorded a liability of $7.4 million and recognized a gain on the sale of $26.3 million for the thirteen weeks ended December 24, 2011. Filterfresh was included in the CBU segment.

 

As of September 24, 2011, all the assets and liabilities relating to the Filterfresh business were reported in the Consolidated Balance Sheets as assets and liabilities held-for-sale.

 

Filterfresh revenues and net income included in the Company’s consolidated statement of operations for the thirteen weeks ended December 24, 2011 and December 25, 2010 were as follows (dollars in thousands, except per share data):

 

 

 

For the period
September 25, 2011
through October 3,
2011 (date of sale)

 

For the period
December 17, 2010
(date of acquisition)
through December 25,
2010

 

Net sales

 

$

2,286

 

$

2,438

 

 

 

 

 

 

 

Net income

 

$

229

 

$

332

 

Less income attributable to noncontrolling interests

 

$

20

 

$

27

 

Net income attributable to GMCR

 

$

209

 

$

305

 

 

 

 

 

 

 

Diluted net income per share

 

$

0.00

 

$

0.00

 

 

After the disposition, the Company continues to sell coffee and brewers to Filterfresh, which prior to the sale of Filterfresh have been eliminated and are not reflected in the Consolidated Statement of Operations.  For the thirteen weeks ended December 24, 2011 the Company’s sales to Filterfresh during the period September 25, 2011 through October 3, 2011 (date of sale) that have been eliminated in consolidation were $0.6 million. For the thirteen weeks ended December 25, 2010, the Company’s sales to Filterfresh during the period December 17, 2010 (date of acquisition) through December 25, 2010 that have been eliminated in consolidation were $0.7 million.

 

Fiscal Year 2011

 

On December 17, 2010, the Company acquired all of the outstanding capital stock of LJVH Holdings, Inc. (“LJVH” and together with its subsidiaries, “Van Houtte”), a specialty coffee roaster headquartered in Montreal, Quebec, for approximately USD $907.8 million, net of cash acquired. The acquisition was financed with cash on hand and a new $1,450.0 million

 

7



 

credit facility. Van Houtte’s functional currency is the Canadian dollar.  Van Houtte operations are included in the CBU segment.

 

Van Houtte specializes in sourcing, producing, and selling coffees in a variety of packaging formats, including K-Cup® packs, and whose brands include Van Houtte®, Brûlerie St. Denis®, Brûlerie Mont-Royal® and Orient Express® and its licensed Bigelow® and Wolfgang Puck® brands.

 

At the time of the acquisition, the Company accounted for all the assets relating to the Filterfresh business as held-for-sale.

 

The Company finalized the valuation and purchase price allocation for Van Houtte during the third quarter of fiscal 2011.  The Van Houtte acquisition was accounted for under the acquisition method of accounting. The total purchase price was USD $907.8 million, net of cash acquired.  The total purchase price was allocated to Van Houtte’s net tangible assets and identifiable intangible assets based on their estimated fair values as of December 17, 2010.  The fair value assigned to identifiable intangible assets acquired was determined primarily by using an income approach. The allocation of the purchase price is based upon a valuation using management’s estimates and assumptions.  The table below represents the allocation of the purchase price to the acquired net assets of Van Houtte (in thousands):

 

 

 

 

 

Van Houtte

 

Filterfresh

 

 

 

 

 

Canadian

 

Assets Held

 

 

 

Total

 

Operations

 

For Sale

 

Restricted cash

 

$

500

 

$

500

 

$

 

Accounts receivable

 

61,130

 

47,554

 

13,576

 

Inventories

 

42,958

 

36,691

 

6,267

 

Income taxes receivable

 

2,260

 

2,190

 

70

 

Deferred income taxes

 

4,903

 

3,577

 

1,326

 

Other current assets

 

5,047

 

4,453

 

594

 

Fixed assets

 

143,928

 

110,622

 

33,306

 

Intangible assets

 

375,099

 

355,549

 

19,550

 

Goodwill

 

472,331

 

409,493

 

62,838

 

Other long-term assets

 

1,577

 

962

 

615

 

Accounts payable and accrued expenses

 

(54,502

)

(46,831

)

(7,671

)

Other short-term liabilities

 

(4,330

)

(3,404

)

(926

)

Income taxes payable

 

(1,496

)

(1,496

)

 

Deferred income taxes

 

(117,086

)

(104,866

)

(12,220

)

Notes payable

 

(2,914

)

(1,770

)

(1,144

)

Other long-term liabilities

 

(2,452

)

(1,683

)

(769

)

Non-controlling interests

 

(19,118

)

(9,529

)

(9,589

)

 

 

 

 

 

 

 

 

 

 

$

907,835

 

$

802,012

 

$

105,823

 

 

The purchase price allocated to Filterfresh was the fair value, less the estimated direct costs to sell Filterfresh established at the acquisition date. The fair value of Filterfresh was estimated using an income approach, specifically the discounted cash flow (“DCF”) method. Under the DCF method the fair value is calculated by discounting the projected after-tax cash flows for the business to present value. The income approach includes assumptions

 

8



 

about the amount and timing of future cash flows using projections and other estimates. A discount rate based on an appropriate weighted average cost of capital was applied to the estimated future cash flows to estimate the fair value.

 

An income approach, specifically the DCF method, was used to value the noncontrolling interests.

 

Amortizable intangible assets acquired, valued at the date of acquisition, include approximately $263.1 million for customer relationships, $10.9 million for trademarks and trade names, $1.4 million for franchises and $0.3 million for technology.  Indefinite-lived intangible assets acquired include approximately $99.4 million for the Van Houtte trademark which is not amortized.  The definite lived intangible assets classified as held-for-sale are not amortized and approximated $19.5 million. Amortizable intangible assets are amortized on a straight-line basis over their respective useful live, and the weighted-average amortization period is 10.8 years.

 

The cost of the acquisition in excess of the fair market value of the tangible and intangible assets acquired less liabilities assumed represents acquired goodwill. The acquisition provides the Company with an expanded Canadian presence and manufacturing and distribution synergies, which provide the basis of the goodwill recognized with respect to the Van Houtte Canadian operations. As discussed in the paragraph above, the purchase price allocated to Filterfresh was the fair value, less the estimated direct costs to sell Filterfresh established at the acquisition date.  The excess of the purchase price (fair value) allocated to Filterfresh over the fair value of the net tangible and identifiable intangible assets represents goodwill.  Goodwill and intangible assets are reported in the CBU segment. The goodwill and intangible assets recognized are not deductible for tax purposes.

 

Acquisition costs were expensed as incurred and totaled approximately $8.8 million for the thirteen weeks ended December 25, 2010 and are included in general and administrative expenses for the Company.

 

At December 24, 2011, after releasing approximately $17.6 million of the purchase price from escrow in December, approximately $9.0 million of the purchase price is held in escrow and is included in restricted cash with the corresponding amount in other current liabilities.

 

The acquisition was completed on December 17, 2010 and accordingly results of operations from such date have been included in the Company’s Statement of Operations. For the thirteen weeks ended December 24, 2011, the Van Houtte acquisition resulted in an additional $111.9 million of consolidated revenue and $13.5 million of consolidated income before income taxes. For the thirteen weeks ended December 25, 2010, the Van Houtte acquisition resulted in an additional $8.8 million of consolidated revenue and $1.5 million of consolidated loss before income taxes.

 

Supplemental Pro Forma Information

 

The following information reflects the Company’s acquisitions as if the transactions had occurred as of the beginning of the Company’s fiscal 2011. The unaudited pro forma information does not necessarily reflect the actual results that would have occurred had the acquisitions been combined during the periods presented, nor is it necessarily indicative of the future results of operations of the combined companies.

 

The following table represents select unaudited consolidated pro forma data (dollars in thousands except per share data):

 

9



 

 

 

Thirteen

 

 

 

weeks ended

 

 

 

December 25,

 

 

 

2010

 

Unaudited Consolidated proforma revenue

 

$

689,911

 

Unaudited Consolidated proforma net income

 

$

6,728

 

Unaudited Consolidated proforma diluted earnings per common share

 

$

0.05

 

 

3.               Segment Reporting

 

The Company manages its operations through three business segments, the Specialty Coffee business unit (“SCBU”), the Keurig business unit (“KBU”) and the Canadian business unit (“CBU”).

 

SCBU sources, produces and sells coffee, hot cocoa, teas and other beverages, to be prepared hot or cold, in K-Cup® packs and coffee in more traditional packaging including whole bean and ground coffee selections in bags and ground coffee in fractional packs. These varieties are sold to supermarkets, club stores and convenience stores, restaurants and hospitality, office coffee distributors and also directly to consumers in the United States. In addition, SCBU sells the Keurig® Single Cup Brewing system and other accessories to supermarkets and directly to consumers.

 

KBU targets its premium patented single-cup brewing systems for use both at-home (“AH”) and away-from-home (“AFH”), in the United States. KBU sells AH single-cup brewers, accessories and coffee, tea, cocoa and other beverages in K-Cup® packs produced mainly by SCBU and CBU primarily to retailers, department stores and mass merchandisers principally processing its sales orders through fulfillment entities for the AH channels. KBU sells AFH single-cup brewers to distributors for use in offices. KBU also sells AH brewers, a limited number of AFH brewers and K-Cup® packs directly to consumers. KBU earns royalty income from K-Cup® packs when shipped by its third party licensed roasters, except for shipments of K-Cup® packs to KBU, for which the royalty is recognized as a reduction to the carrying cost of the inventory and as a reduction to cost of sales when sold through to third parties by KBU. In addition, through the second quarter of fiscal 2011, KBU earned royalty income from K-Cup® packs when shipped by SCBU and CBU.

 

CBU sources, produces and sells coffees and teas and other beverages in a variety of packaging formats, including K-Cup® packs, and coffee in more traditional packaging such as bags, cans and fractional packs, and under a variety of brands.  The varieties are sold primarily to supermarkets, club stores and, through office coffee services to offices, convenience stores and restaurants throughout Canada. CBU began selling the Keurig® Single Cup Brewing system, accessories and coffee, tea, cocoa, and other beverages in K-Cup® packs to retailers, department stores and mass merchandisers in Canada for the AH channels in the first quarter of 2012.  CBU also manufactures brewing equipment and is responsible for all the Company coffee brand sales in the grocery channel in Canada.  The CBU segment included the Van Houtte U.S. Coffee Service business (“Filterfresh”) through October 3, 2011, the date of sale (see Note 2, Acquisitions and Divestitures ).

 

The Company evaluates performance based on several factors, including business segment income before taxes. The operating segments do not share any significant manufacturing or distribution facilities. Information system technology services are mainly centralized while Finance functions are primarily decentralized, but currently maintain some centralization through an enterprise shared services group. The costs of the Company’s manufacturing operations are captured within the SCBU and CBU segments.  The Company’s inventory and accounts receivable are captured and reported discretely within each operating segment.

 

Expenses related to certain centralized administrative functions including Accounting and Information System Technology are allocated to the operating segments. Expenses not specifically related to an operating segment are recorded in the “Corporate” segment.

 

10



 

Corporate expenses are comprised mainly of the compensation and other related expenses of certain of the Company’s senior executive officers and other selected employees who perform duties related to the entire enterprise. Corporate expenses also include depreciation expense, interest expense, foreign exchange gains or losses, certain corporate legal and acquisition-related expenses and compensation of the board of directors. Corporate assets include primarily cash, short-term investments, deferred tax assets, income tax receivable, certain notes receivable eliminated in consolidation, deferred issuance costs and fixed assets. Corporate total assets as of December 25, 2010 have been revised to include deferred issuance costs and fixed assets, which were previously included in the SCBU segment, to reflect the current presentation. Goodwill and intangibles related to acquisitions are included in their respective segments.

 

The Company analyzes its business and records net sales on a segment basis and eliminates intersegment sales as part of its financial consolidation process.

 

Effective with the beginning of the Company’s third quarter of fiscal 2011, KBU no longer records royalty income from SCBU and CBU on shipments of K-Cup® packs, thus removing the need to eliminate royalty income during the financial consolidation process.  Prior to the third quarter of fiscal 2011, the Company recorded intersegment sales and purchases of brewer and K-Cup® packs at a markup.  During the third quarter of fiscal 2011, the Company unified the standard costs of brewer and K-Cup® pack inventories across the segments and began recording intersegment sales and purchases of brewers and K-Cup® packs at new unified standard costs. This change simplified intercompany transactions by removing the need to eliminate the markup incorporated in intersegment sales as part of the financial consolidation process.

 

As a result of the unification of the standard costs of brewers and K-Cup® packs during the third quarter of fiscal 2011, the Company’s segment inventories were revalued and an adjustment was recorded by the respective segments which resulted in an increase in cost of sales and a decrease in inventories. This adjustment was offset with the reversal of the elimination of intersegment markup in inventories in the consolidation process resulting in no impact to the Company’s consolidated results.

 

The above changes were not retrospectively applied.

 

Effective with the beginning of fiscal year 2012, the Company changed its organizational structure to align certain portions of its business by geography. Prior to fiscal 2012, sales and operations associated with the Timothy’s brand was included in the SCBU segment and a portion of the AH single-cup business with retailers in Canada was included in the KBU segment.  Under the new structure, Timothy’s and all of the AH single-cup business with retailers in Canada are included in the CBU segment. This resulted in a re-assignment of goodwill of $17.1 million from the SCBU segment to the CBU segment using a relative fair value approach.  In addition, effective September 25, 2011, K-Cup® pack and brewer inventories are now transferred directly between SCBU and KBU.  Intersegment sales are no longer transacted between SCBU and KBU.

 

The following tables summarize selected financial data for segment disclosures for the thirteen weeks ended December 24, 2011 and December 25, 2010. Selected financial data for segment disclosures for the thirteen weeks ended December 25, 2010 have been recast to reflect Timothy’s and the AH single-cup business with retailers in Canada in the CBU segment.

 

11



 

 

 

For the thirteen weeks ended December 24, 2011

 

 

 

(Dollars in thousands)

 

 

 

SCBU

 

KBU

 

CBU

 

Corporate

 

Eliminations

 

Consolidated

 

Sales to unaffiliated customers

 

$

368,587

 

$

601,470

 

$

188,159

 

$

 

$

 

$

1,158,216

 

Intersegment sales

 

$

3,960

 

$

2,917

 

$

33,691

 

$

 

$

(40,568

)

$

 

Net sales

 

$

372,547

 

$

604,387

 

$

221,850

 

$

 

$

(40,568

)

$

1,158,216

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before taxes

 

$

84,321

 

$

43,405

 

$

61,748

 

$

(21,545

)

$

 

$

167,929

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

1,284,844

 

$

678,418

 

$

1,143,142

 

$

591,055

 

$

(479,202

)

$

3,218,257

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock compensation

 

$

1,115

 

$

770

 

$

325

 

$

1,306

 

$

 

$

3,516

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

$

 

$

 

$

 

$

6,463

 

$

 

$

6,463

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property additions

 

$

87,429

 

$

7,053

 

$

17,135

 

$

9,112

 

$

 

$

120,729

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

$

16,073

 

$

3,096

 

$

13,720

 

$

4,175

 

$

 

$

37,064

 

 

 

 

For the thirteen weeks ended December 25, 2010

 

 

 

(Dollars in thousands)

 

 

 

SCBU

 

KBU

 

CBU

 

Corporate

 

Eliminations

 

Consolidated

 

Sales to unaffiliated customers

 

$

199,594

 

$

326,115

 

$

48,439

 

$

 

$

 

$

574,148

 

Intersegment sales

 

$

123,729

 

$

68,653

 

$

15,987

 

$

 

$

(208,369

)

$

 

Net sales

 

$

323,323

 

$

394,768

 

$

64,426

 

$

 

$

(208,369

)

$

574,148

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before taxes

 

$

52,716

 

$

(1,093

)

$

4,976

 

$

(36,020

)

$

(8,032

)

$

12,547

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

891,742

 

$

396,434

 

$

1,274,226

 

$

535,008

 

$

(495,199

)

$

2,602,211

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock compensation

 

$

719

 

$

501

 

$

19

 

$

961

 

$

 

$

2,200

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

$

 

$

 

$

 

$

6,058

 

$

 

$

6,058

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property additions

 

$

21,345

 

$

5,083

 

$

1,279

 

$

9,942

 

$

 

$

37,649

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

$

9,823

 

$

2,263

 

$

3,411

 

$

2,634

 

$

 

$

18,131

 

 

4.               Inventories

 

Inventories consisted of the following (in thousands):

 

 

 

December 24,
2011

 

September 24,
2011

 

Raw materials and supplies

 

$

241,129

 

$

182,811

 

Finished goods

 

365,550

 

489,437

 

 

 

$

606,679

 

$

672,248

 

 

Inventory values above are presented net of $10.5 million and $5.6 million of obsolescence adjustments at December 24, 2011 and September 24, 2011, respectively.

 

At December 24, 2011, the Company had approximately $477.5 million in green coffee purchase commitments, of which approximately 80% had a fixed price. These commitments primarily extend through fiscal 2013. The value of the variable portion of these commitments was calculated using an average “C” price of coffee of $2.29 per pound at December 24, 2011. In addition to its green coffee commitments, the Company had approximately $164.0 million in fixed price brewer inventory purchase commitments and $633.6 million in production raw materials commitments at December 24, 2011. The

 

12



 

Company believes based on relationships established with its suppliers that the risk of non-delivery on such purchase commitments is remote.

 

At December 24, 2011, minimum future inventory purchase commitments are as follows (in thousands):

 

Fiscal Year

 

Inventory
Purchase
Obligations

 

Remainder of 2012

 

$

724,143

 

2013

 

101,957

 

2014

 

93,005

 

2015

 

93,979

 

2016

 

97,303

 

Thereafter

 

164,689

 

 

 

$

1,275,076

 

 

5.                           Fixed Assets

 

Fixed assets consist of the following (in thousands):

 

 

 

Useful Life in

 

December 24,

 

September 24,

 

 

 

Years

 

2011

 

2011

 

Production equipment

 

1-15

 

$

376,181

 

$

314,149

 

Coffee service equipment

 

3-7

 

56,498

 

53,319

 

Computer equipment and software

 

1-6

 

87,814

 

78,377

 

Land

 

Indefinite

 

9,644

 

8,790

 

Building and building improvements

 

4-30

 

60,279

 

54,648

 

Furniture and fixtures

 

1-15

 

22,771

 

21,619

 

Vehicles

 

4-5

 

8,398

 

7,860

 

Leasehold improvements

 

1-20 or remaining life of lease, whichever is less

 

27,973

 

35,496

 

Assets acquired under capital leases

 

5

 

9,847

 

 

Construction-in-progress

 

 

 

182,235

 

147,860

 

 

 

 

 

 

 

 

 

Total fixed assets

 

 

 

$

841,640

 

$

722,118

 

 

 

 

 

 

 

 

 

Accumulated depreciation

 

 

 

(166,876

)

(142,899

)

 

 

 

 

$

674,764

 

$

579,219

 

 

Assets acquired under capital leases, net of accumulated depreciation, were $8.9 million at December 24, 2011.

 

Total depreciation and amortization expense relating to all fixed assets was $25.6 million and $12.0 million for the thirteen weeks ended December 24, 2011 and December 25, 2010, respectively.

 

Assets classified as construction-in-progress are not depreciated, as they are not ready for productive use. All assets classified as construction-in-progress on December 24, 2011 are expected to be in productive use within the next twelve months.

 

6.               Goodwill and Intangible Assets

 

The following represents the change in the carrying amount of goodwill by segment for the thirteen weeks ended December 24, 2011 (in thousands):

 

13



 

 

 

SCBU

 

KBU

 

CBU

 

Total

 

Balance at September 24, 2011

 

$

314,042

 

$

72,374

 

$

402,889

 

$

789,305

 

Reassignment of Timothy’s goodwill

 

(17,063

)

 

 

17,063

 

 

Foreign currency effect

 

 

 

3,395

 

3,395

 

Balance at December 24, 2011

 

$

296,979

 

$

72,374

 

$

423,347

 

$

792,700

 

 

Effective September 25, 2011, Timothy’s is included in the CBU segment. Prior to September 25, 2011, Timothy’s was included in the SCBU segment. This resulted in a re-assignment of goodwill of $17.1 million from the SCBU segment to the CBU segment using a relative fair value approach.  The amount of goodwill reassigned was determined based on the relative fair values of Timothy’s and SCBU.

 

Indefinite-lived intangible assets included in the CBU operating segment consist of the following (in thousands):

 

 

 

December 24, 2011

 

September 24, 2011

 

Trade names

 

$

98,648

 

$

97,824

 

 

Intangible Assets Subject to Amortization

 

Definite-lived intangible assets consist of the following (in thousands):

 

 

 

 

 

December 24, 2011

 

September 24, 2011

 

 

 

Useful Life in

 

Gross Carrying

 

Accumulated

 

Gross Carrying

 

Accumulated

 

 

 

Years

 

Amount

 

Amortization

 

Amount

 

Amortization

 

Intangible assets subject to amortization

 

 

 

 

 

 

 

 

 

 

 

Acquired technology

 

4-10

 

$

21,611

 

$

(14,045

)

$

21,609

 

$

(13,525

)

Customer and roaster agreements

 

8-11

 

27,271

 

(14,490

)

27,259

 

(13,723

)

Customer relationships

 

7-16

 

420,940

 

(49,967

)

418,901

 

(40,593

)

Trade names

 

9-11

 

37,681

 

(6,874

)

37,611

 

(5,919

)

Non-compete agreements

 

2-5

 

374

 

(329

)

374

 

(324

)

Total

 

 

 

$

507,877

 

$

(85,705

)

$

505,754

 

$

(74,084

)

 

Definite-lived intangible assets are amortized on a straight-line basis over the period of expected economic benefit.  Total amortization expense was $11.5 million and $6.1 million for the thirteen weeks ended December 24, 2011 and December 25, 2010, respectively.

 

The estimated aggregate amortization expense for the remainder of fiscal 2012, for each of the next five years and thereafter, is as follows (in thousands):

 

Remainder of 2012

 

$

34,228

 

2013

 

$

45,474

 

2014

 

$

44,864

 

2015

 

$

43,313

 

2016

 

$

42,597

 

2017

 

$

41,201

 

Thereafter

 

$

170,495

 

 

7.     Assets Held for Sale

 

The following is a summary of the major classes of assets and liabilities of Filterfresh included as assets and liabilities held-for-sale as of September 24, 2011 (in thousands):

 

14



 

Cash

 

$

5,160

 

Accounts receivable, net of allowance for uncollectible accounts of $0.3 million

 

12,734

 

Inventories

 

7,212

 

Other current assets

 

779

 

Total current assets

 

$

25,885

 

 

 

 

 

Fixed Assets

 

$

37,780

 

Intangibles

 

19,550

 

Goodwill

 

62,838

 

Other long-term assets

 

415

 

Total long-term assets

 

$

120,583

 

 

 

 

 

Current portion of long-term debt

 

$

673

 

Accounts payable

 

2,226

 

Accrued compensation

 

2,287

 

Accrued expenses

 

3,229

 

Income taxes payable

 

32

 

Deferred income taxes, net

 

10,894

 

Total current liabilities

 

$

19,341

 

 

 

 

 

Long-term debt

 

$

185

 

Other long-term liabilities

 

289

 

Total long-term liabilities

 

$

474

 

 

In addition, redeemable noncontrolling interests include a non-wholly owned subsidiary included in the Filterfresh business of $10.3 million as of September 24, 2011.

 

8.     Product Warranties

 

The Company offers a one-year warranty on all Keurig® Single-Cup brewers it sells. KBU provides for the estimated cost of product warranties, primarily using historical information and repair or replacement costs, at the time product revenue is recognized. The Company continues to experience higher-than-historical rate warranty claims associated with its reservoir brewer models. As of December 24, 2011, management’s analysis of these claims remains consistent with its previous diagnosis of a later-stage performance issue caused by a component failing at higher-than-anticipated rates. While not a safety concern, when manifested, brewers with this issue operate inconsistently or cease operation at a later stage of the warranty life.  This issue is not presenting itself consistently across all units, and whether or not it occurs depends on a number of variables including brewer usage rate and water quality. Management believes that they have identified the root cause of the component failure in 2010 and units produced since January 2011 incorporate an improved component that is expected to substantially eliminate the issue.  While the Company maintains a reserve for product warranty costs based on certain estimates that include the findings relating to this component failure, because this arises in the later part of the warranty period, actual warranty costs may exceed the reserve, and there can be no assurance that the Company will not need to increase the reserve or experience additional warranty expense related to this quality issue in future periods. At this time, management believes that the warranty rates used and related reserves are appropriate.

 

As the Company has grown, it has added significantly to its product testing, quality control infrastructure and overall quality processes.  Nevertheless, as the Company continues to innovate, and its products become more complex, both in design and componentry, product performance may tend to modulate, causing warranty rates to possibly fluctuate going

 

15



 

forward, so that they may be higher or lower than the Company is currently experiencing and for which the Company is currently providing for in its warranty reserve.

 

The changes in the carrying amount of product warranties for the thirteen weeks ended December 24, 2011 and December 25, 2010 are as follows (in thousands):

 

 

 

Thirteen weeks ended

 

 

 

December 24, 2011

 

December 25, 2010

 

Balance, beginning of year

 

$

14,728

 

$

6,694

 

Provision charged to income

 

24,047

 

16,625

 

Usage, net of recoveries

 

(12,720

)

(5,628

)

Balance, end of period

 

$

26,055

 

$

17,691

 

 

9.      Redeemable Noncontrolling Interests

 

In the CBU segment, a portion of the coffee services business operates through non-wholly owned subsidiaries. The financial statements consolidate entities in which the Company has a controlling financial interest. Redeemable noncontrolling interests may be redeemed by the Company at amounts based on formulas specific to each entity.  The Company classifies redeemable noncontrolling interests outside of shareholders’ equity in the consolidated balance sheet under the caption, Redeemable noncontrolling interests , and measures it at the redemption value at the end of each period. If the redemption value is greater than the carrying value, an adjustment is recorded in retained earnings to record the noncontrolling interest at its redemption value. Net income attributable to noncontrolling interests reflect the portion of the net income (loss) applicable to the noncontrolling interest partners in the consolidated statement of operations. The net income attributable to noncontrolling interests is classified in the consolidated statements of operations as part of consolidated net income with the net income attributable to the noncontrolling interests deducted from total consolidated net income.

 

If a change in ownership of a consolidated subsidiary results in a loss of control or deconsolidation, any retained ownership interests are re-measured with the gain or loss reported to net earnings.  On October 3, 2011, in conjunction with the sale of Filterfresh, the Company sold its controlling interest in a non-wholly owned subsidiary of Filterfresh.  The resulting gain on the disposition of the Company’s interest in the subsidiary is included in the gain on the sale of Filterfresh, (see Note 2, Acquisitions and Divestitures) .

 

10.  Derivative Financial Instruments

 

Cash Flow Hedges

 

The Company is exposed to certain risks relating to ongoing business operations.  The primary risks that are mitigated by financial instruments are interest rate risk and commodity price risk.  The Company uses interest rate swaps to mitigate interest rate risk associated with the Company’s variable-rate borrowings and enters into coffee futures contracts to hedge future coffee purchase commitments of green coffee with the objective of minimizing cost risk due to market fluctuations.

 

The Company designates these contracts as cash flow hedges and measures the effectiveness of these derivative instruments at each balance sheet date.  The changes in the fair value of these instruments are classified in accumulated other comprehensive income (“OCI”).  Gains and losses on these instruments are reclassified into earnings in the same period or periods during which the hedged transaction affects earnings.  If it is

 

16



 

determined that a derivative is not highly effective, the gains and losses will be reclassified into earnings upon determination.

 

Fair Value Hedges

 

The Company enters into foreign currency forward contracts to hedge certain recognized liabilities in currencies other than the Company’s functional currency. The Company designates these contracts as fair value hedges and measures the effectiveness of these derivative instruments at each balance sheet date.  The changes in the fair value of these instruments along with the changes in the fair value of the hedged liabilities are recognized in net gains or losses on foreign currency on the consolidated statements of operations.

 

Other Derivatives

 

The Company is also exposed to certain foreign currency and interest rate risks on an intercompany note with a foreign subsidiary denominated in Canadian currency. The Company has entered into a five year, $150.0 million Canadian cross currency swap to exchange interest payments and principal on the intercompany note. This cross currency swap is not designated as a hedging instrument for accounting purposes and is recorded at fair value, with the changes in fair value recognized in the Consolidated Statements of Operations.  Gains and losses resulting from the change in fair value are largely offset by the financial impact of the re-measurement of the intercompany note. In accordance with the cross currency swap agreement, on a quarterly basis, the Company pays interest based on the three month Canadian Bankers Acceptance rate and receives interest based on the three month U.S. Libor rate.  Additional interest expense pursuant to the cross currency swap agreement for the thirteen weeks ended December 24, 2011 was $0.5 million.

 

In conjunction with the acquisition of Van Houtte (see Note 2, Acquisitions and Divestitures) , the Company assumed certain derivative financial instruments entered into by Van Houtte prior to the acquisition.  These derivatives include foreign currency forward contracts and coffee futures contracts and were established to mitigate certain foreign currency and commodity risks.  These derivatives were not designated as hedging instruments for accounting purposes and are recorded at fair value, with the changes in fair value recognized in the Consolidated Statements of Operations.

 

The Company does not hold or use derivative financial instruments for trading or speculative purposes.

 

The Company is exposed to credit loss in the event of nonperformance by the counterparties to these financial instruments, however nonperformance is not anticipated.

 

The following table summarizes the fair value of the Company’s derivatives included in the Consolidated Balance Sheets (in thousands).

 

17



 

 

 

December 24,
2011

 

September 24,
2011

 

Balance Sheet Classification

 

 

 

 

 

 

 

 

 

Derivatives designated as hedges:

 

 

 

 

 

 

 

Cash Flow Hedges:

 

 

 

 

 

 

 

Interest rate swaps

 

$

(8,703

)

$

(10,269

)

Other current liabilities

 

Coffee futures

 

(861

)

(424

)

Other current liabilities

 

 

 

$

(9,564

)

$

(10,693

)

 

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedges:

 

 

 

 

 

 

 

Cross currency swap

 

$

(3,461

)

$

(2,324

)

Other current liabilities

 

Interest rate cap

 

38

 

34

 

Other current assets

 

 

 

(3,423

)

(2,290

)

 

 

Total

 

$

(12,987

)

$

(12,983

)

 

 

 

The following table summarizes the amount of gain (loss), gross of tax, on financial instruments that qualify for hedge accounting included in other comprehensive income (in thousands).

 

 

 

Thirteen weeks ended

 

 

 

December 24,

 

December 25,

 

 

 

2011

 

2010

 

Cash Flow Hedges:

 

 

 

 

 

Interest rate swaps

 

$

1,566

 

$

645

 

Coffee futures

 

(437

)

 

Total

 

$

1,129

 

$

645

 

 

The following table summarizes the amount of gain (loss), gross of tax, reclassified from other comprehensive income to income (in thousands).

 

 

 

Thirteen weeks ended

 

 

 

 

 

December 24,

 

December 25,

 

Location of Gain or (Loss)

 

 

 

2011

 

2010

 

Reclassified from OCI into Income

 

Cash Flow Hedges:

 

 

 

 

 

 

 

Coffee futures

 

$

(249

)

$

 

Cost of Sales

 

Total

 

$

(249

)

$

 

 

 

 

The Company expects to reclassify $0.1 million of net gains, net of tax, from other comprehensive income to earnings for coffee derivatives within the next twelve months.

 

The following table summarizes the amount of gain (loss), gross of tax, on fair value hedges and related hedged items (in thousands).

 

 

 

Thirteen weeks ended

 

Thirteen weeks ended

 

 

 

 

 

December 24, 2011

 

December 25, 2010

 

 

 

 

 

Gain (loss) on
hedging
derivatives

 

Gain (loss) on
hedged items

 

Gain (loss) on
hedging
derivatives

 

Gain (loss) on
hedged items

 

Location of gain (loss)
recognized in income on
derivative

 

Foreign currency forwards contracts

 

$

(29

)

$

29

 

$

 

$

 

Gain on foreign currency, net

 

 

Net gains (losses) on financial instruments not designated as hedges for accounting purposes is as follows (in thousands).

 

18



 

 

 

Thirteen weeks ended

 

 

 

December 24,

 

December 25,

 

 

 

2011

 

2010

 

Net loss on cross currency swap

 

$

(1,137

)

$

(3,652

)

Net gain on coffee futures

 

 

530

 

Net gain on interest rate cap

 

3

 

 

Net loss on foreign currency option and forward contracts

 

 

(3,220

)

Total

 

$

(1,134

)

$

(6,342

)

 

The net loss on foreign currency contracts were primarily related to contracts entered into to mitigate the risk associated with the Canadian denominated purchase price of Van Houtte.

 

11.  Fair Value Measurements

 

The Company measures fair value as the selling price that would be received for an asset, or paid to transfer a liability, in the principal or most advantageous market on the measurement date. The hierarchy established by the Financial Accounting Standards Board prioritizes fair value measurements based on the types of inputs used in the valuation technique.  The inputs are categorized into the following levels:

 

Level 1 — Observable inputs such as quoted prices in active markets for identical assets or liabilities.

 

Level 2 — Inputs other than quoted prices that are observable, either directly or indirectly, for identical or similar assets and liabilities in active or non-active markets.

 

Level 3 — Unobservable inputs not corroborated by market data, therefore requiring the entity to use the best available information, including management assumptions.

 

The following table discloses the level used by fair value measurements at December 24, 2011 (in thousands):

 

 

 

Fair Value Measurements Using

 

Balance Sheet

 

Financial Instrument

 

Level 1

 

Level 2

 

Level 3

 

Classification

 

Derivatives

 

$

 

$

38

 

$

 

Other current assets

 

Derivatives

 

 

(13,025

)

 

Other current liabilities

 

Total

 

$

 

$

(12,987

)

$

 

 

 

 

The following table discloses the level used by fair value measurements at September 24, 2011 (in thousands):

 

 

 

Fair Value Measurements Using

 

Balance Sheet

 

Financial Instrument

 

Level 1

 

Level 2

 

Level 3

 

Classification

 

Derivatives

 

$

 

$

34

 

$

 

Other current assets

 

Derivatives

 

$

 

(13,017

)

$

 

Other current liabilities

 

Total

 

$

 

$

(12,983

)

$

 

 

 

 

Derivative financial instruments include coffee futures contracts, interest rate swap and cap agreements. The Company has identified significant concentrations of credit risk based on the economic characteristics of the instrument that include interest rates, commodity indexes and foreign currency rates and selectively enters into the derivative instruments with counterparties using credit ratings.

 

19



 

To determine fair value, the Company utilizes the market approach valuation technique for coffee futures and the income approach for interest rate swap agreements. The Company’s fair value measurements include a credit valuation adjustment for the significant concentrations of credit risk.

 

Level 2 derivative financial instruments use inputs that are based on market data of identical (or similar) instruments, including forward prices for commodities, interest rates curves and spot prices, that are in observable markets. Derivatives recorded on the balance sheet are at fair value with changes in fair value recorded in other comprehensive income for cash flow hedges and in the Consolidated Statements of Operations for fair value hedges and derivatives that do not qualify for hedge accounting treatment.

 

As of December 24, 2011 the amount of loss estimated by the Company due to credit risk associated with the derivatives for all significant concentrations was not material based on the factors of an industry recovery rate and a calculated probability of default.

 

12.  Income Taxes

 

The Company recognizes deferred tax assets and liabilities for the expected future tax benefits or consequences of temporary differences between the financial statement carrying amounts of existing assets and liabilities, and their respective tax bases.  Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled.

 

As of December 24, 2011, the Company had a state net operating loss carryforward of $11.5 million, as well as a $17.7 million state capital loss carryforward available to be utilized against future taxable income for years through fiscal year 2029, subject to annual limitation pertaining to change in ownership rules.  Based upon earnings history, the Company has concluded that it is more likely than not that the net operating loss carryforward will be utilized prior to its expiration, but the capital loss carryforward will not.  The Company has recorded a valuation allowance against the entire deferred tax asset balance for the capital loss carryforward.

 

The total amount of unrecognized tax benefits at December 24, 2011 and September 24, 2011 was $27.3 million and $24.4 million, respectively.  The amount of unrecognized tax benefits at December 24, 2011 that would impact the effective tax rate if resolved in favor of the Company is $19.7 million.  As a result of prior acquisitions, the Company is indemnified for up to $16.5 million of the total reserve balance, and the indemnification is capped at CAD $37.9 million.  If these unrecognized tax benefits are resolved in favor of the Company, the associated indemnification receivable, recorded in other long-term assets, would be reduced accordingly.  The indemnifications expire through June 2015.

 

The Company’s tax basis in the stock of Van Houtte USA Holdings, Inc. was lower than its book basis, resulting in additional tax on the sale.  The Company released the valuation allowance against its remaining $8.8 million of federal capital loss carryforward during the first quarter of fiscal 2012.

 

The Company has made an election to recognize interest and penalties accrued on uncertain tax liabilities as interest expense.  The Company does not expect a significant change to the amount of unrecognized tax benefits within the next twelve months.

 

13.  Stockholders’ Equity

 

Accumulated Other Comprehensive Loss

 

Components of accumulated other comprehensive loss, net of tax (in thousands):

 

20



 

 

 

December 24,

 

September 24,

 

 

 

2011

 

2011

 

Net unrealized loss on derivatives classified as cash flow hedges

 

$

(5,044

)

$

(5,866

)

Foreign currency translation adjustment

 

(4,410

)

(8,709

)

 

 

$

(9,454

)

$

(14,575

)

 

The unfavorable translation adjustment change during fiscal 2012 was primarily due to the weakening of the Canadian dollar against the U.S. dollar. See also Note 10, Derivative Financial Instruments.

 

14.  Compensation Plans

 

Stock Option Plans

 

The grant-date fair value of employee stock options and similar instruments is estimated using the Black-Scholes option-pricing model with the following assumptions for grants issued in the first quarter of fiscal 2012 and 2011:

 

 

 

Thirteen weeks ended

 

 

 

December 24,

 

December 25,

 

 

 

2011

 

2010

 

Average expected life

 

6 year

 

6 years

 

Average volatility

 

60

%

49

%

Dividend yield

 

 

 

Risk-free interest rate

 

1.2

%

2.3

%

Weighted average fair value

 

$

35.21

 

$

15.61

 

 

Employee Stock Purchase Plan

 

The grant-date fair value of employees’ purchase rights under the Company’s Employee Stock Purchase Plan is estimated using the Black-Scholes option-pricing model with the following assumptions for the purchase rights granted in the first quarter of fiscal 2012 and 2011:

 

 

 

Thirteen weeks ended

 

 

 

December 24,

 

December 25,

 

 

 

2011

 

2010

 

Average expected life

 

6 months

 

6 months

 

Average volatility

 

53

%

43

%

Dividend yield

 

 

 

Risk-free interest rate

 

0.0

%

0.2

%

Weighted average fair value

 

$

13.55

 

$

10.21

 

 

For the thirteen weeks ended December 24, 2011 and December 25, 2010, income before income taxes was reduced by a stock compensation expense of $3.5 million and $2.2 million (gross of tax), respectively.

 

Deferred Compensation Plan

 

The Company also maintains a Deferred Compensation Plan, which is not subject to the qualification requirements of Section 401(a) of the Internal Revenue Code and which allows participants to defer compensation until a future date. Only non-employee directors and certain highly compensated employees of the Company selected by the Company’s board of directors are eligible to participate in the Plan. In each of the thirteen week periods ended December 24, 2011 and December 25, 2010, $0.1 million of compensation expense was recorded under this Plan.

 

21



 

15.  Legal Proceedings

 

On October 1, 2010, Keurig filed suit against Sturm Foods, Inc. (“Sturm”) in the United States District Court for the District of Delaware (Civil Action No. 1:10-CV-00841-SLR) for patent and trademark infringement, false advertising, and other claims, related to Sturm’s sale of “Grove Square” beverage cartridges that claim to be compatible with Keurig® brewers. The suit alleges that the “Grove Square” cartridges contain instant rather than fresh-brewed coffee, improperly use the “Keurig” mark, and do not work safely or effectively in Keurig® Single Cup Brewers, in addition to violating Keurig patents (U.S. Patent Nos. 7,165,488 and 6,606,938). Keurig seeks an injunction prohibiting Sturm from selling these cartridges, as well as money damages. On October 18, 2010, Keurig requested that the court issue a preliminarily injunction on the use of the “Keurig” mark and false advertising claims pending final resolution of the case.  The court denied that request so those issues will be resolved in due course during the litigation.

 

On November 2, 2011, Keurig filed suit against JBR, INC., d/b/a Rogers Family Company (“Rogers”) in the United States District Court for the District of Massachusetts (Civil Action No. 1:11-cv-11941-MBB) for patent infringement related to Rogers’s sale of “San Francisco Bay” beverage