Keurig Green Mountain, Inc.
GREEN MOUNTAIN COFFEE ROASTERS INC (Form: 10-Q, Received: 05/08/2013 16:18:53)

Table of Contents

 

 

 

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 March 30, 2013

 

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 May 2, 2013, 149,190,870 shares of common stock of the registrant were outstanding.

 

 

 



Table of Contents

 

GREEN MOUNTAIN COFFEE ROASTERS, INC.

Form 10-Q

For the Thirteen Weeks Ended March 30, 2013

 

Table of Contents

 

 

 

Page

PART I. FINANCIAL INFORMATION

1

Item 1.

Financial Statements

1

 

Unaudited Consolidated Balance Sheets

2

 

Unaudited Consolidated Statements of Operations

3

 

Unaudited Consolidated Statements of Comprehensive Income

4

 

Unaudited Consolidated Statements of Changes in Stockholders’ Equity

6

 

Unaudited Consolidated Statements of Cash Flows

7

 

Notes to Unaudited Consolidated Financial Statements

8

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

26

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

41

Item 4.

Controls and Procedures

42

 

 

 

PART II. OTHER INFORMATION

43

Item 1.

Legal Proceedings

43

Item 1A.

Risk Factors

45

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

45

Item 6.

Exhibits

45

Signatures

47

 



Table of Contents

 

Part I.  Financial Information

Item 1.  Financial Statements

 

1



Table of Contents

 

GREEN MOUNTAIN COFFEE ROASTERS, INC.

Unaudited Consolidated Balance Sheets

(Dollars in thousands, except per share data)

 

 

 

March 30,
2013

 

September 29,
2012

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

221,170

 

$

58,289

 

Restricted cash and cash equivalents

 

553

 

12,884

 

Receivables, less uncollectible accounts and return allowances of $47,976 and $34,517 at March 30, 2013 and September 29, 2012, respectively

 

312,880

 

363,771

 

Inventories

 

587,281

 

768,437

 

Income taxes receivable

 

6,496

 

32,943

 

Other current assets

 

42,072

 

35,019

 

Deferred income taxes, net

 

51,104

 

51,613

 

Total current assets

 

1,221,556

 

1,322,956

 

 

 

 

 

 

 

Fixed assets, net

 

977,298

 

944,296

 

Intangibles, net

 

462,241

 

498,352

 

Goodwill

 

793,405

 

808,076

 

Other long-term assets

 

35,710

 

42,109

 

 

 

 

 

 

 

Total assets

 

$

3,490,210

 

$

3,615,789

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Current portion of long-term debt

 

$

9,796

 

$

6,691

 

Current portion of capital lease and financing obligations

 

3,274

 

3,057

 

Accounts payable

 

213,946

 

279,577

 

Accrued compensation costs

 

58,836

 

38,458

 

Accrued expenses

 

143,493

 

132,992

 

Income tax payable

 

12,372

 

29,322

 

Deferred income taxes, net

 

236

 

245

 

Other current liabilities

 

16,357

 

29,645

 

Total current liabilities

 

458,310

 

519,987

 

 

 

 

 

 

 

Long-term debt, less current portion

 

272,885

 

466,984

 

Capital lease and financing obligations, less current portion

 

64,798

 

54,794

 

Deferred income taxes, net

 

269,382

 

270,348

 

Other long-term liabilities

 

25,687

 

32,544

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Redeemable noncontrolling interests

 

10,684

 

9,904

 

 

 

 

 

 

 

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 - 500,000,000 shares; Issued and outstanding - 148,917,424 and 152,680,855 shares at March 30, 2013 and September 29, 2012, respectively

 

14,892

 

15,268

 

Additional paid-in capital

 

1,373,366

 

1,464,560

 

Retained earnings

 

1,009,985

 

771,200

 

Accumulated other comprehensive (loss) income

 

(9,779

)

10,200

 

Total stockholders’ equity

 

2,388,464

 

2,261,228

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

3,490,210

 

$

3,615,789

 

 

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

 

2



Table of Contents

 

GREEN MOUNTAIN COFFEE ROASTERS, INC.

Unaudited Consolidated Statements of Operations

(Dollars in thousands, except per share data)

 

 

 

Thirteen weeks ended

 

Twenty-six weeks ended

 

 

 

March 30,
2013

 

March 24,
2012

 

March 30,
2013

 

March 24,
2012

 

Net sales

 

$

1,004,792

 

$

885,052

 

$

2,343,851

 

$

2,043,268

 

Cost of sales

 

589,646

 

572,014

 

1,509,542

 

1,393,626

 

Gross profit

 

415,146

 

313,038

 

834,309

 

649,642

 

 

 

 

 

 

 

 

 

 

 

Selling and operating expenses

 

124,781

 

111,105

 

296,626

 

252,463

 

General and administrative expenses

 

78,261

 

52,340

 

143,138

 

101,748

 

Operating income

 

212,104

 

149,593

 

394,545

 

295,431

 

 

 

 

 

 

 

 

 

 

 

Other income, net

 

227

 

669

 

415

 

1,360

 

Gain (loss) on financial instruments, net

 

3,471

 

(2,112

)

4,575

 

(3,246

)

(Loss) gain on foreign currency, net

 

(6,115

)

3,613

 

(8,794

)

6,299

 

Gain on sale of subsidiary

 

 

 

 

26,311

 

Interest expense

 

(3,814

)

(6,042

)

(9,544

)

(12,505

)

Income before income taxes

 

205,873

 

145,721

 

381,197

 

313,650

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

(73,302

)

(52,458

)

(140,681

)

(115,705

)

Net income

 

$

132,571

 

$

93,263

 

$

240,516

 

$

197,945

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to noncontrolling interests

 

150

 

232

 

512

 

500

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to GMCR

 

$

132,421

 

$

93,031

 

$

240,004

 

$

197,445

 

 

 

 

 

 

 

 

 

 

 

Basic income per share:

 

 

 

 

 

 

 

 

 

Basic weighted average shares outstanding

 

148,774,443

 

155,049,294

 

149,044,980

 

154,876,465

 

Net income per common share - basic

 

$

0.89

 

$

0.60

 

$

1.61

 

$

1.27

 

 

 

 

 

 

 

 

 

 

 

Diluted income per share:

 

 

 

 

 

 

 

 

 

Diluted weighted average shares outstanding

 

152,310,053

 

159,374,545

 

152,550,160

 

159,368,142

 

Net income per common share - diluted

 

$

0.87

 

$

0.58

 

$

1.57

 

$

1.24

 

 

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

 

3



Table of Contents

 

GREEN MOUNTAIN COFFEE ROASTERS, INC.

Unaudited Consolidated Statements of Comprehensive Income

(Dollars in thousands)

 

 

 

Thirteen weeks ended

 

Thirteen weeks ended

 

 

 

March 30, 2013

 

March 24, 2012

 

 

 

Pre-tax

 

Tax (expense)
benefit

 

After-tax

 

Pre-tax

 

Tax (expense)
benefit

 

After-tax

 

Net income

 

 

 

 

 

$

132,571

 

 

 

 

 

$

93,263

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains (losses) arising during the period

 

$

588

 

$

(237

)

$

351

 

$

(1,859

)

$

750

 

$

(1,109

)

Losses reclassified to net income

 

379

 

(153

)

226

 

85

 

(34

)

51

 

Foreign currency translation adjustments

 

(13,038

)

 

(13,038

)

11,818

 

 

11,818

 

Other comprehensive (loss) income

 

$

(12,071

)

$

(390

)

$

(12,461

)

$

10,044

 

$

716

 

$

10,760

 

Total comprehensive income

 

 

 

 

 

120,110

 

 

 

 

 

104,023

 

Total comprehensive (loss) income attributable to noncontrolling interests

 

 

 

 

 

(164

)

 

 

 

 

473

 

Total comprehensive income attributable to GMCR

 

 

 

 

 

$

120,274

 

 

 

 

 

$

103,550

 

 

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

 

4



Table of Contents

 

GREEN MOUNTAIN COFFEE ROASTERS, INC.

Unaudited Consolidated Statements of Comprehensive Income

(Dollars in thousands)

 

 

 

Twenty-six weeks ended

 

Twenty-six weeks ended

 

 

 

March 30, 2013

 

March 24, 2012

 

 

 

Pre-tax

 

Tax (expense)
benefit

 

After-tax

 

Pre-tax

 

Tax (expense)
benefit

 

After-tax

 

Net income

 

 

 

 

 

$

240,516

 

 

 

 

 

$

197,945

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains (losses) arising during the period

 

$

722

 

$

(291

)

$

431

 

$

(730

)

$

295

 

$

(435

)

Losses reclassified to net income

 

728

 

(294

)

434

 

334

 

(135

)

199

 

Foreign currency translation adjustments

 

(21,355

)

 

(21,355

)

16,209

 

 

16,209

 

Other comprehensive (loss) income

 

$

(19,905

)

$

(585

)

$

(20,490

)

$

15,813

 

$

160

 

$

15,973

 

Total comprehensive income

 

 

 

 

 

220,026

 

 

 

 

 

213,918

 

Total comprehensive income attributable to noncontrolling interests

 

 

 

 

 

1

 

 

 

 

 

833

 

Total comprehensive income attributable to GMCR

 

 

 

 

 

$

220,025

 

 

 

 

 

$

213,085

 

 

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

 

5



Table of Contents

 

GREEN MOUNTAIN COFFEE ROASTERS, INC.

Unaudited Consolidated Statement of Changes in Stockholders’ Equity

For the Twenty-six Weeks Ended March 30, 2013

(Dollars in thousands)

 

 

 

Common stock

 

Additional paid-in

 

Retained

 

Accumulated
other
comprehensive

 

Stockholders’

 

 

 

Shares

 

Amount

 

capital

 

earnings

 

income (loss)

 

equity

 

Balance at September 29, 2012

 

152,680,855

 

$

15,268

 

$

1,464,560

 

$

771,200

 

$

10,200

 

$

2,261,228

 

Options exercised

 

842,193

 

84

 

3,998

 

 

 

4,082

 

Issuance of common stock under employee stock purchase plan

 

247,593

 

25

 

5,227

 

 

 

5,252

 

Restricted stock awards and units

 

11,376

 

1

 

(1

)

 

 

 

Repurchase of common stock

 

(4,864,593

)

(486

)

(125,195

)

 

 

(125,681

)

Stock compensation expense

 

 

 

15,072

 

 

 

15,072

 

Tax benefit from equity-based compensation plans

 

 

 

9,563

 

 

 

9,563

 

Deferred compensation expense

 

 

 

142

 

 

 

142

 

Adjustment of redeemable noncontrolling interests to redemption value

 

 

 

 

(1,219

)

 

(1,219

)

Other comprehensive income (loss), net of tax

 

 

 

 

 

(19,979

)

(19,979

)

Net income

 

 

 

 

240,004

 

 

240,004

 

Balance at March 30, 2013

 

148,917,424

 

$

14,892

 

$

1,373,366

 

$

1,009,985

 

$

(9,779

)

$

2,388,464

 

 

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

 

6



Table of Contents

 

GREEN MOUNTAIN COFFEE ROASTERS, INC.

Unaudited Consolidated Statements of Cash Flows

(Dollars in thousands)

 

 

 

Twenty-six

 

Twenty-six

 

 

 

weeks ended

 

weeks ended

 

 

 

March 30,
2013

 

March 24,
2012

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

240,516

 

$

197,945

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation

 

87,820

 

55,822

 

Amortization of intangibles

 

22,939

 

23,021

 

Amortization of deferred financing fees

 

3,025

 

3,025

 

Unrealized loss (gain) on foreign currency, net

 

7,178

 

(4,547

)

Loss on disposal of fixed assets

 

241

 

1,265

 

Gain on sale of subsidiary, excluding transaction costs

 

 

(28,914

)

Provision for doubtful accounts

 

(15

)

1,656

 

Provision for sales returns

 

58,812

 

67,402

 

(Gain) loss on derivatives, net

 

(3,847

)

3,580

 

Excess tax benefits from equity-based compensation plans

 

(9,563

)

(11,172

)

Deferred income taxes

 

2,901

 

8,325

 

Deferred compensation and stock compensation

 

15,214

 

9,336

 

Other

 

449

 

5

 

Changes in assets and liabilities:

 

 

 

 

 

Receivables

 

(9,827

)

(55,546

)

Inventories

 

177,665

 

72,671

 

Income tax receivable/payable, net

 

19,237

 

65,050

 

Other current assets

 

(7,861

)

(17,871

)

Other long-term assets, net

 

3,371

 

(436

)

Accounts payable, accrued expenses and accrued compensation costs

 

3,721

 

(17,474

)

Other current liabilities

 

(137

)

(2,878

)

Other long-term liabilities

 

(7,154

)

(109

)

Net cash provided by operating activities

 

604,685

 

370,156

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Change in restricted cash

 

3,013

 

665

 

Proceeds from sale of subsidiary, net of cash transferred

 

 

137,733

 

Capital expenditures for fixed assets

 

(148,349

)

(204,556

)

Other investing activities

 

231

 

444

 

Net cash used in investing activities

 

(145,105

)

(65,714

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Net change in revolving line of credit

 

(184,949

)

(182,814

)

Proceeds from issuance of common stock under compensation plans

 

9,334

 

2,228

 

Repurchase of common stock

 

(125,681

)

 

Excess tax benefits from equity-based compensation plans

 

9,563

 

11,172

 

Payments on capital lease and financing obligations

 

(1,547

)

(3,148

)

Repayment of long-term debt

 

(3,391

)

(4,552

)

Other financing activities

 

(549

)

(149

)

Net cash used in financing activities

 

(297,220

)

(177,263

)

 

 

 

 

 

 

Change in cash balances included in current assets held for sale

 

 

5,160

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

521

 

675

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

162,881

 

133,014

 

Cash and cash equivalents at beginning of period

 

58,289

 

12,989

 

Cash and cash equivalents at end of period

 

$

221,170

 

$

146,003

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

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

 

$

21,437

 

$

44,672

 

Noncash investing and financing activities:

 

 

 

 

 

Fixed assets acquired under capital lease and financing obligations

 

$

11,769

 

$

44,174

 

Settlement of acquisition related liabilities through release of restricted cash

 

$

9,227

 

$

18,788

 

 

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

 

7



Table of Contents

 

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 accounting principles generally accepted in the United States of America (“GAAP”) 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 GAAP for complete consolidated financial statements.

 

In the opinion of management, all adjustments considered necessary for a fair statement of the interim financial data have been included.  Results from operations for the thirteen and twenty-six week periods ended March 30, 2013 are not necessarily indicative of the results that may be expected for the fiscal year ending September 28, 2013.

 

The September 29, 2012 balance sheet data was derived from audited financial statements but does not include all disclosures required by GAAP.  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 29, 2012.  Throughout this presentation, we refer to the consolidated company as the “Company” and, unless otherwise noted, the information provided is on a consolidated basis.

 

2.               Recent Accounting Pronouncements

 

In March 2013, the Financial Accounting Standards Board (the “FASB”) issued an Accounting Standards Update (“ASU”) No. 2013-05, “Foreign Currency Matters (Topic 830): Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity” (“ASU 2013-05”).  ASU 2013-05 provides clarification regarding whether Subtopic 810-10, Consolidation - Overall, or Subtopic 830-30, Foreign Currency Matters - Translation of Financial Statements, applies to the release of cumulative translation adjustments into net income when a reporting entity either sells a part or all of its investment in a foreign entity or ceases to have a controlling financial interest in a subsidiary or group of assets that constitute a business within a foreign entity.  The amendments in this ASU are effective prospectively for reporting periods beginning after December 15, 2013, and early adoption is permitted.  The adoption of ASU 2013-05 is not expected to have an impact on the Company’s net income, financial position or cash flows.

 

In February 2013, the FASB issued ASU No. 2013-04, “Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date” (“ASU 2013-04”).  ASU 2013-04 provides guidance for the recognition, measurement and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this ASU is fixed at the reporting date.  The guidance requires an entity to measure those obligations as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors as well as any additional amount the reporting entity expects to pay on behalf of its co-obligors.  ASU 2013-04 also requires an entity to disclose the nature and amount of those obligations.  The amendments in this ASU are effective for reporting periods beginning after December 15, 2013, with early adoption permitted.  Retrospective application is required.  The adoption of ASU 2013-04 is not expected to have a material impact on the Company’s net income, financial position or cash flows.

 

In February 2013, the FASB issued ASU No. 2013-02, “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Comprehensive Income” (“ASU 2013-02”).  ASU 2013-02 requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under GAAP to be reclassified in its entirety to net income.  For significant items not reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures that provide additional detail about those amounts.  The amendments in this ASU are effective for annual reporting periods, and interim periods within those annual reporting periods, beginning after December 15, 2012, which for the Company will be the first quarter of fiscal 2014.  The adoption of ASU 2013-02 is not expected to have an impact on the Company’s net income, financial position or cash flows.

 

In December 2011, the FASB issued ASU No. 2011-11, “Disclosures about Offsetting Assets and Liabilities,” (“ASU 2011-11”) that provides amendments for disclosures about offsetting assets and liabilities.  The amendments require an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position.  Entities are required to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement.

 

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On January 31, 2013, the FASB issued ASU No. 2013-01, “Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities,” which clarified that the scope of the disclosures is limited to include derivatives, sale and repurchase agreements and reverse sale and repurchase agreements, and securities borrowing and securities lending arrangements.  The amendments are effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods.  Disclosures required by the amendments should be provided retrospectively for all comparative periods presented.  For the Company, the amendments are effective for the fiscal year ending September 27, 2014 (fiscal year 2014).  The Company has not adopted the amendments and is currently evaluating the impact these amendments may have on its disclosures.

 

3.               Divestiture

 

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 the “Filterfresh” business were sold to ARAMARK Refreshment Services, LLC (“ARAMARK”) in exchange for $149.5 million in cash.  Approximately $4.4 million of cash was transferred to ARAMARK as part of the sale and $7.4 million was repaid to ARAMARK upon finalization of the purchase price, resulting in a net cash inflow related to the Filterfresh sale of $137.7 million.  The Company recognized a gain on the sale of $26.3 million during the thirteen weeks ended December 24, 2011.  Filterfresh had been included in the Canadian business unit (“CBU”) segment.

 

Filterfresh revenues and net income included in the Company’s Unaudited Consolidated Statements of Operations were as follows (dollars in thousands, except per share data):

 

 

 

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

 

Net sales

 

$

2,286

 

 

 

 

 

Net income

 

$

229

 

Less income attributable to noncontrolling interests

 

20

 

Net income attributable to GMCR

 

$

209

 

 

 

 

 

Diluted net income per share

 

$

0.00

 

 

After the disposition, the Company continues to sell coffee and brewers to Filterfresh, which prior to the sale of Filterfresh were eliminated and were not reflected in the Unaudited Consolidated Statements of Operations.  The Company’s sales to Filterfresh for the period September 25, 2011 through October 3, 2011 (date of sale) that were eliminated in consolidation were $0.6 million.

 

4.               Segment Reporting

 

The Company has historically managed its operations through three business segments: the Specialty Coffee business unit (“SCBU”), the Keurig business unit (“KBU”) and CBU.  The Company announced on May 8, 2013, that effective May 8, 2013, the SCBU and KBU segments were combined to bring greater organizational efficiency and coordination across the Company.  Due to this combination, the results of the SCBU and KBU segments will be reported as a consolidated segment beginning in the third quarter of fiscal 2013, and prior periods will be recast.

 

SCBU sources, produces and sells coffee, hot cocoa, teas and other beverages, to be prepared hot or cold, in K-Cup ®  and Vue ®  packs (“single serve 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, convenience stores, restaurants and hospitality, office coffee distributors, and directly to consumers in the United States.  In addition, SCBU sells at-home (“AH”) Keurig ®  Single Cup Brewing systems and other accessories to supermarkets and directly to consumers, and away-from-home (“AFH”) Keurig ®  Single Cup Brewing systems to distributors for use primarily in offices.

 

KBU targets its premium patented single cup brewing systems for use AH in the United States.  KBU sells AH single cup brewers, accessories and coffee, tea, cocoa and other beverages in single serve 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.

 

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KBU also sells AH brewers, a limited number of AFH brewers and single serve 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.

 

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.  In addition, CBU sells the Keurig ®  K-Cup ®  Single Cup Brewing system, accessories and coffee, tea, and other beverages in K-Cup ®  packs to retailers, department stores and mass merchandisers in Canada for the AH channels.  CBU also manufactures brewing equipment and is responsible for all of the Company’s coffee brand sales in the grocery channel in Canada.  The CBU segment included Filterfresh through October 3, 2011, the date of sale (see Note 3, Divestitures ).

 

Management evaluates the performance of the Company’s operating segments based on several factors, including net sales to external customers and operating income.  Net sales are recorded on a segment basis and intersegment sales are eliminated as part of the financial consolidation process.  Operating income represents gross profit less selling, operating, general and administrative expenses.  The Company’s manufacturing operations occur within the SCBU and CBU segments, however, the costs of manufacturing are recognized in cost of sales in the operating segment in which the sale occurs.  Information system technology services are mainly centralized while finance and accounting functions are primarily decentralized, but currently maintain some centralization through an enterprise shared services group.  Expenses consisting primarily of compensation and depreciation 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.  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 for corporate headquarters, interest expense not directly attributable to an operating segment, the majority of foreign exchange gains or losses, certain corporate legal expenses and compensation of the Board of Directors.

 

Identifiable assets by segment are those assets specifically identifiable within each segment, and for the SCBU, KBU and CBU segments, primarily include accounts receivable, inventories, fixed assets, goodwill, and other intangible assets.  Corporate assets primarily include cash, short-term investments, deferred tax assets, income taxes receivable, intercompany notes receivable that are eliminated in consolidation, deferred issuance costs, and fixed assets related to information system technology and corporate headquarters.  Goodwill and intangibles related to acquisitions are included in their respective segments.

 

Effective for fiscal 2013, the Company changed its measure for reporting segment profitability and for evaluating segment performance and the allocation of Company resources from income before taxes to operating income.  Historically, the Company has disclosed each operating and reporting segment’s income before taxes to report segment profitability.  Segment disclosures for prior periods have been recast to reflect operating income by segment in place of income before taxes.

 

Sales between operating segments are transacted at cost.  As a result, intersegment sales have no impact on operating income and the Company no longer discloses intersegment sales.  Net sales for the thirteen and twenty-six weeks ended March 30, 2013 and comparative historical periods include only net sales to external customers.

 

Effective at the beginning of fiscal year 2013, the Company consolidated the AFH selling teams in the United States from the SCBU segment and the KBU segment into one organization and implemented a team approach to customers who purchase significant volumes of both brewers and single serve packs.  Due to the consolidation, the results of the AFH channel are now reported in the SCBU segment.  The Company did not change its operating or reportable segments and the management structure remains the same with the President of each business unit reporting directly to our Chief Executive Officer.  Prior periods were not recast as the changes resulting from the consolidation of the AFH channel in the SCBU segment did not materially affect the trends in asset balances or in reported results for either SCBU or KBU for any quarterly or year-to-date period.  The AFH net sales reported in the KBU segment for thirteen and twenty-six weeks ended March 24, 2012 was approximately $18.7 million and $43.2 million, respectively.  The AFH operating income reported in the KBU segment for the thirteen and twenty-six weeks ended March 24, 2012 was approximately $0.8 million and $4.2 million, respectively.

 

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The following tables summarize selected financial data for segment disclosures for the thirteen and twenty-six weeks ended March 30, 2013 and March 24, 2012:

 

 

 

Thirteen weeks ended March 30, 2013

 

 

 

(Dollars in thousands)

 

 

 

SCBU

 

KBU

 

CBU

 

Corporate

 

Eliminations

 

Consolidated

 

Net sales

 

$

517,460

 

$

348,135

 

$

139,197

 

$

 

$

 

$

1,004,792

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

$

163,453

 

$

66,815

 

$

19,122

 

$

(37,286

)

$

 

$

212,104

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

1,478,110

 

$

935,518

 

$

1,098,463

 

$

759,060

 

$

(780,941

)

$

3,490,210

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock compensation

 

$

1,542

 

$

1,132

 

$

930

 

$

5,358

 

$

 

$

8,962

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

$

928

 

$

387

 

$

741

 

$

2,388

 

$

(630

)

$

3,814

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property additions

 

$

14,579

 

$

13,153

 

$

4,930

 

$

22,044

 

$

 

$

54,706

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

$

31,503

 

$

7,097

 

$

16,279

 

$

535

 

$

 

$

55,414

 

 

 

 

Thirteen weeks ended March 24, 2012

 

 

 

(Dollars in thousands)

 

 

 

SCBU

 

KBU

 

CBU

 

Corporate

 

Eliminations

 

Consolidated

 

Net sales

 

$

385,263

 

$

362,844

 

$

136,945

 

$

 

$

 

$

885,052

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

$

97,016

 

$

49,878

 

$

12,281

 

$

(9,582

)

$

 

$

149,593

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

1,383,754

 

$

716,069

 

$

1,129,883

 

$

653,369

 

$

(573,868

)

$

3,309,207

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock compensation

 

$

1,146

 

$

1,105

 

$

800

 

$

2,642

 

$

 

$

5,693

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

$

 

$

 

$

 

$

6,042

 

$

 

$

6,042

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property additions

 

$

106,354

 

$

8,599

 

$

8,280

 

$

23,825

 

$

 

$

147,058

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization(1)

 

$

21,306

 

$

5,517

 

$

14,955

 

$

1

 

$

 

$

41,779

 

 


(1)          Reported segment depreciation and amortization has been revised to reflect depreciation expense for Information Systems Technology (“IST”) equipment that was allocated to operating segments in each segment’s income before taxes.  In the Company’s Quarterly Report on Form 10-Q for the thirteen weeks ended March 24, 2012, filed on May 2, 2012, IST equipment depreciation expense was appropriately allocated, recorded and reported on a consolidated basis and in each operating segment’s income before taxes; however, on the depreciation and amortization line, IST equipment depreciation of $4.9 million that should have been reported under the operating segments was reported in the Corporate segment.  The historical issues with the depreciation and amortization lines did not impact the segment reporting for any other line items, including operating income.  Management believes the revision to operating segments’ depreciation and amortization was not material.

 

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Table of Contents

 

 

 

Twenty-six weeks ended March 30, 2013

 

 

 

(Dollars in thousands)

 

 

 

SCBU

 

KBU

 

CBU

 

Corporate

 

Eliminations

 

Consolidated

 

Net Sales

 

$

1,042,017

 

$

955,513

 

$

346,321

 

$

 

$

 

$

2,343,851

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

$

315,373

 

$

100,270

 

$

44,351

 

$

(65,449

)

$

 

$

394,545

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

1,478,110

 

$

935,518

 

$

1,098,463

 

$

759,060

 

$

(780,941

)

$

3,490,210

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock compensation

 

$

3,173

 

$

2,020

 

$

1,355

 

$

8,524

 

$

 

$

15,072

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

$

2,073

 

$

387

 

$

1,845

 

$

6,580

 

$

(1,341

)

$

9,544

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property additions

 

$

54,280

 

$

25,089

 

$

9,241

 

$

36,822

 

$

 

$

125,432

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

$

64,475

 

$

13,117

 

$

32,437

 

$

730

 

$

 

$

110,759

 

 

 

 

Twenty-six weeks ended March 24, 2012

 

 

 

(Dollars in thousands)

 

 

 

SCBU

 

KBU

 

CBU

 

Corporate

 

Eliminations

 

Consolidated

 

Net Sales

 

$

753,850

 

$

964,314

 

$

325,104

 

$

 

$

 

$

2,043,268

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

$

188,463

 

$

97,091

 

$

37,782

 

$

(27,905

)

$

 

$

295,431

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

1,383,754

 

$

716,069

 

$

1,129,883

 

$

653,369

 

$

(573,868

)

$

3,309,207

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock compensation

 

$

2,261

 

$

1,875

 

$

1,125

 

$

3,948

 

$

 

$

9,209

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

$

 

$

 

$

 

$

12,505

 

$

 

$

12,505

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property additions

 

$

193,783

 

$

15,652

 

$

25,415

 

$

32,937

 

$

 

$

267,787

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization(1)

 

$

39,038

 

$

10,473

 

$

29,330

 

$

2

 

$

 

$

78,843

 

 


(1)          Reported segment depreciation and amortization has been revised to reflect depreciation expense for IST equipment that was allocated to operating segments in each segment’s income before taxes.  In the Company’s Quarterly Report on Form 10-Q for the thirteen weeks ended March 24, 2012, filed on May 2, 2012, IST equipment depreciation expense was appropriately allocated, recorded and reported on a consolidated basis and in each operating segment’s income before taxes; however, on the depreciation and amortization line, IST equipment depreciation of $9.1 million for the twenty-six weeks ended March 24, 2012 that should have been reported under the operating segments was reported in the Corporate segment.  The historical issues with the depreciation and amortization lines did not impact the segment reporting for any other line items, including operating income.  Management believes the revision to operating segments’ depreciation and amortization was not material.

 

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The following table reconciles the total segment operating income to consolidated income before income taxes, as presented in the Unaudited Consolidated Statements of Operations (in thousands):

 

 

 

Thirteen weeks ended

 

Twenty-six weeks ended

 

 

 

March 30, 2013

 

March 24, 2012

 

March 30, 2013

 

March 24, 2012

 

Operating income

 

$

212,104

 

$

149,593

 

$

394,545

 

$

295,431

 

Other income, net

 

227

 

669

 

415

 

1,360

 

Gain (loss) on financial instruments, net

 

3,471

 

(2,112

)

4,575

 

(3,246

)

(Loss) gain on foreign currency, net

 

(6,115

)

3,613

 

(8,794

)

6,299

 

Gain on sale of subsidiary

 

 

 

 

26,311

 

Interest expense

 

(3,814

)

(6,042

)

(9,544

)

(12,505

)

Income before income taxes

 

$

205,873

 

$

145,721

 

$

381,197

 

$

313,650

 

 

5.               Inventories

 

Inventories consisted of the following (in thousands) as of:

 

 

 

March 30,
2013

 

September 29,
2012

 

Raw materials and supplies

 

$

176,752

 

$

229,927

 

Finished goods

 

410,529

 

538,510

 

 

 

$

587,281

 

$

768,437

 

 

At March 30, 2013, the Company had approximately $272.2 million in green coffee purchase commitments, of which approximately 87% had a fixed price.  These commitments primarily extend through fiscal 2014.  The value of the variable portion of these commitments was calculated using an average “C” price of coffee of $1.47 per pound at March 30, 2013.  In addition to its green coffee commitments, the Company had approximately $201.0 million in fixed price brewer and related accessory purchase commitments and $531.5 million in production raw material commitments at March 30, 2013.  The Company believes, based on relationships established with its suppliers, that the risk of non-delivery on such purchase commitments is remote.

 

As of March 30, 2013, minimum future inventory purchase commitments are as follows (in thousands):

 

Fiscal Year

 

Inventory
Purchase
Obligations

 

Remainder of 2013

 

$

476,311

 

2014

 

150,184

 

2015

 

104,291

 

2016

 

109,879

 

2017

 

84,465

 

Thereafter

 

79,577

 

 

 

$

1,004,707

 

 

In order to ensure a continuous supply of high quality raw materials some of the Company’s inventory purchase obligations include long-term purchase commitments for certain strategic raw materials critical for the manufacture of single serve packs.

 

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6.               Fixed Assets

 

Fixed assets consisted of the following (in thousands) as of:

 

 

 

Useful Life in
Years

 

March 30,
2013

 

September 29,
2012

 

Production equipment

 

1-15

 

$

607,852

 

$

544,491

 

Coffee service equipment

 

3-7

 

68,816

 

63,722

 

Computer equipment and software

 

1-6

 

140,528

 

111,441

 

Land

 

Indefinite

 

11,578

 

11,740

 

Building and building improvements

 

4-30

 

125,620

 

83,172

 

Furniture and fixtures

 

1-15

 

32,392

 

28,477

 

Vehicles

 

4-5

 

10,663

 

10,306

 

Leasehold improvements

 

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

 

93,424

 

72,755

 

Assets acquired under capital leases

 

5-15

 

51,047

 

51,047

 

Construction-in-progress

 

 

 

185,521

 

234,442

 

Total fixed assets

 

 

 

$

1,327,441

 

$

1,211,593

 

Accumulated depreciation

 

 

 

(350,143

)

(267,297

)

 

 

 

 

$

977,298

 

$

944,296

 

 

Assets acquired under capital leases, net of accumulated depreciation, were $44.6 million and $47.0 million at March 30, 2013 and September 29, 2012, respectively. 

 

Total depreciation and amortization expense relating to all fixed assets was $44.0 million and $30.2 million for the thirteen weeks ended March 30, 2013 and March 24, 2012, respectively.  Total depreciation and amortization expense relating to all fixed assets was $87.8 million and $55.8 million for the twenty-six weeks ended March 30, 2013 and March 24, 2012, respectively. 

 

7.               Goodwill and Intangible Assets

 

The following represents the change in the carrying amount of goodwill by segment for the twenty-six weeks ended March 30, 2013 (in thousands):

 

 

 

SCBU

 

KBU

 

CBU

 

Total

 

Balance at September 29, 2012

 

$

296,979

 

$

72,374

 

$

438,723

 

$

808,076

 

Foreign currency effect

 

 

 

(14,671

)

(14,671

)

Balance at March 30, 2013

 

$

296,979

 

$

72,374

 

$

424,052

 

$

793,405

 

 

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

 

 

 

March 30, 2013

 

September 29, 2012

 

Trade names

 

$

98,958

 

$

102,381

 

 

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Intangible Assets Subject to Amortization

 

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

 

 

 

 

 

March 30, 2013

 

September 29, 2012

 

 

 

Useful Life in
Years

 

Gross Carrying
Amount

 

Accumulated
Amortization

 

Gross Carrying
Amount

 

Accumulated
Amortization

 

Acquired technology

 

4-10

 

$

21,612

 

$

(16,277

)

$

21,622

 

$

(15,433

)

Customer and roaster agreements

 

8-11

 

27,068

 

(18,257

)

27,323

 

(16,796

)

Customer relationships

 

2-16

 

418,924

 

(95,681

)

430,178

 

(79,168

)

Trade names

 

9-11

 

37,410

 

(11,536

)

38,000

 

(9,785

)

Non-compete agreements

 

2-5

 

374

 

(354

)

374

 

(344

)

Total

 

 

 

$

505,388

 

$

(142,105

)

$

517,497

 

$

(121,526

)

 

Definite-lived intangible assets are amortized on a straight-line basis over the period of expected economic benefit.  Total amortization expense was $11.4 million and $11.5 million for the thirteen weeks ended March 30, 2013 and March 24, 2012, respectively.  Total amortization expense was $22.9 million and $23.0 million for the twenty-six weeks ended March 30, 2013 and March 24, 2012, respectively. 

 

The estimated aggregate amortization expense for the remainder of fiscal 2013, for each of the next five years and thereafter, is as follows (in thousands):

 

Remainder of 2013

 

$

22,910

 

2014

 

44,708

 

2015

 

43,157

 

2016

 

42,451

 

2017

 

41,056

 

2018

 

41,056

 

Thereafter

 

127,945

 

 

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 is continuing to experience warranty claims at a lower rate than the average rates experienced over each of the prior two years, which had related primarily to a component failing at higher-than-anticipated rates in the later stage of the warranty life.  Management believes that the lower rates are the result of improvements made in units produced since mid-2011 that incorporated an updated component that improved later-stage performance.  The Company has incorporated the impact of this recent improvement in the rate of warranty claims into its estimates used in its reserve for product warranty costs.  However, because brewer failures may arise in the later part of the warranty period, actual warranty costs may exceed the reserve.  As a result, there can be no assurance that the Company will not need to increase the reserve or experience additional warranty expense related to this or other quality issues 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 modulate, causing warranty rates to possibly fluctuate going forward.  As a result, future warranty claims rates may be higher or lower than the Company is currently experiencing and for which the Company is currently providing in its warranty reserve.

 

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Table of Contents

 

The changes in the carrying amount of product warranties for the thirteen and twenty-six weeks ended March 30, 2013 and March 24, 2012 are as follows (in thousands):

 

 

 

Thirteen weeks ended

 

Twenty-six weeks ended

 

 

 

March 30, 2013

 

March 24, 2012

 

March 30, 2013

 

March 24, 2012

 

Balance, beginning of period

 

$

24,356

 

$

26,055

 

$

20,218

 

$

14,728

 

Provision charged to income

 

(3,805

)

11,773

 

7,186

 

35,820

 

Usage

 

(6,095

)

(12,088

)

(12,948

)

(24,808

)

Balance, end of period

 

$

14,456

 

$

25,740

 

$

14,456

 

$

25,740

 

 

For the thirteen and twenty-six weeks ended March 30, 2013, the Company recorded recoveries of $0.3 million and $0.6 million, respectively.  For the thirteen and twenty-six weeks ended March 24, 2012 the Company recorded recoveries of $8.1 million.  The recoveries are under an agreement with a supplier and are recorded as a reduction of warranty expense.  The recoveries are not reflected in the provision charged to income in the table above.

 

9.               Noncontrolling Interests

 

Noncontrolling interests (“NCI”) are evaluated by the Company and are shown as either a liability, temporary equity (shown between liabilities and equity) or as permanent equity depending on the nature of the redeemable features at amounts based on formulas specific to each entity.  Generally, mandatorily redeemable NCIs are classified as liabilities and non-mandatorily redeemable NCIs are classified as either temporary or permanent equity.  Redeemable NCIs that are not mandatorily redeemable are classified outside of stockholders’ equity in the Unaudited Consolidated Balance Sheets as temporary equity under the caption, Redeemable noncontrolling interests, and are measured at their redemption values 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 NCI at its redemption value.  Redeemable NCIs that are mandatorily redeemable are classified as a liability in the Unaudited Consolidated Balance Sheets under the caption, Other long-term liabilities , and are measured at the amount of cash that would be paid if settlement occurred at the balance sheet date based on the formula in the Share Purchase and Sale Agreement dated June 22, 2012, with any change from the prior period recognized as interest expense.

 

Net income attributable to NCIs reflects the portion of the net income of consolidated entities applicable to the NCI shareholders in the accompanying Unaudited Consolidated Statements of Operations.  The net income attributable to NCIs is classified in the Unaudited Consolidated Statements of Operations as part of consolidated net income and deducted from total consolidated net income to arrive at the net income attributable to the Company.

 

If a change in ownership of a consolidated subsidiary results in a loss of control or deconsolidation, any retained ownership interests are remeasured with the gain or loss reported to net earnings.

 

The changes in the liability and temporary equity attributable to redeemable NCIs for the twenty-six weeks ended March 30, 2013 are as follows (in thousands):

 

 

 

Liability attributable to
mandatorily redeemable
noncontrolling interests

 

Equity attributable
to redeemable
noncontrolling interests

 

Balance at September 29, 2012

 

$

4,928

 

$

9,904

 

Net income

 

267

 

245

 

Adjustment to redemption value

 

448

 

1,219

 

Cash distributions

 

(199

)

(350

)

Other comprehensive loss

 

(177

)

(334

)

Balance at March 30, 2013

 

$

5,267

 

$

10,684

 

 

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.

 

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Table of Contents

 

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 (loss).  The gain or loss on these instruments is reclassified from other comprehensive income (“OCI”) into earnings in the same period or periods during which the hedged transaction affects earnings.  If it is determined that a derivative is not highly effective, the gain or loss is reclassified into earnings.

 

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 Unaudited 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.  At March 30, 2013, the Company has approximately 3 years remaining on a CDN $120.0 million 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 Unaudited 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 and twenty-six weeks ended March 30, 2013 was $0.4 million and $0.9 million, respectively.  Additional interest expense pursuant to the cross currency swap agreement for the thirteen and twenty-six weeks ended March 24, 2012 was $0.4 million and $0.9 million, respectively.

 

The Company occasionally enters into foreign currency forward contracts and coffee futures contracts which are not designated as hedging instruments for accounting purposes, in addition to the foreign currency forward contracts and coffee futures contracts noted above.  Contracts that are not designated as hedging instruments are recorded at fair value with the changes in fair value recognized in the Unaudited 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 on the Unaudited Consolidated Balance Sheets (in thousands):

 

 

 

March 30, 2013

 

September 29, 2012

 

Balance Sheet Classification

 

Derivatives designated as hedges:

 

 

 

 

 

 

 

Cash Flow Hedges:

 

 

 

 

 

 

 

Interest rate swaps

 

$

(7,349

)

$

(9,019

)

Other current liabilities

 

Coffee futures

 

(114

)

(342

)

Other current liabilities

 

 

 

$

(7,463

)

$

(9,361

)

 

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedges:

 

 

 

 

 

 

 

Cross currency swap

 

$

(2,667

)

$

(7,242

)

Other current liabilities

 

 

 

$

(2,667

)

$

(7,242

)

 

 

 

 

 

 

 

 

 

 

Total

 

$

(10,130

)

$

(16,603

)

 

 

 

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Table of Contents

 

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

 

 

 

Thirteen weeks ended

 

Twenty-six weeks ended

 

 

 

March 30, 2013

 

March 24, 2012

 

March 30, 2013

 

March 24, 2012

 

Cash Flow Hedges:

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

$

638

 

$

(80

)

$

1,670

 

$

1,486

 

Coffee futures

 

(50

)

(1,779

)

(948

)

(2,216

)

Total

 

$

588

 

$

(1,859

)

$

722

 

$

(730

)

 

The following table summarizes the amount of losses, gross of tax, reclassified from OCI to income (in thousands):

 

 

 

Thirteen weeks ended

 

Twenty-six weeks ended

 

 

 

 

 

March 30,
2013

 

March 24,
2012

 

March 30,
2013

 

March 24,
2012

 

Location of Losses Reclassified
from OCI into Income

 

Coffee Futures

 

$

(379

)

$

(85

)

$

(728

)

$

(334

)

Cost of sales

 

Total

 

$

(379

)

$

(85

)

$

(728

)

$

(334

)

 

 

 

The Company expects to reclassify $0.5 million of net losses, net of tax, from OCI 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 for the thirteen weeks ended March 30, 2013 and March 24, 2012 (in thousands):

 

 

 

Thirteen weeks ended

 

 

 

 

 

March 30, 2013

 

March 24, 2012

 

 

 

 

 

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

 

$

(10

)

$

10

 

$

 

$

 

(Loss) gain on foreign currency, net

 

 

The following table summarizes the amount of gain (loss), gross of tax, on fair value hedges and related hedged items for the twenty-six weeks ended March 30, 2013 and March 24, 2012 (in thousands):

 

 

 

Twenty-six weeks ended

 

 

 

 

 

March 30, 2013

 

March 24, 2012

 

 

 

 

 

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

 

$

(10

)

$

10

 

$

(29

)

$

29

 

(Loss) gain on foreign currency, net

 

 

Net gains (losses) on financial instruments not designated as hedges for accounting purposes recorded in gain (loss) on financial instruments, net, is as follows (in thousands):

 

 

 

Thirteen weeks ended

 

Twenty-six weeks ended

 

 

 

March 30, 2013

 

March 24, 2012

 

March 30, 2013

 

March 24, 2012

 

Net gain (loss) on cross currency swap