Keurig Green Mountain, Inc.
KEURIG GREEN MOUNTAIN, INC. (Form: 10-Q, Received: 05/07/2014 16:16:49)

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 29, 2014

 

OR

 

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

 

For the transition period from                      to

 

Keurig Green Mountain, Inc.

 

GRAPHIC

 

Commission file number 1-12340

 

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)

 

f/k/a Green Mountain Coffee Roasters, Inc.

(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 1, 2014, 162,736,073 shares of common stock of the registrant were outstanding.

 

Explanatory Note

 

Effective March 6, 2014, our name changed from Green Mountain Coffee Roasters, Inc. to Keurig Green Mountain, Inc.

 

 

 



Table of Contents

 

KEURIG GREEN MOUNTAIN, INC.

Form 10-Q

For the Thirteen Weeks Ended March 29, 2014

 

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 Statement 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

 

29

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

46

Item 4.

Controls and Procedures

 

48

 

 

 

 

PART II. OTHER INFORMATION

 

49

Item 1.

Legal Proceedings

 

49

Item 1A.

Risk Factors

 

52

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

59

Item 6.

Exhibits

 

60

Signatures

 

 

61

 



Table of Contents

 

Part I.  Financial Information

Item 1.  Financial Statements

 

1



Table of Contents

 

KEURIG GREEN MOUNTAIN, INC.

Unaudited Consolidated Balance Sheets

(Dollars in thousands, except per share data)

 

 

 

March 29,
 2014

 

September 28,
 2013

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

1,112,155

 

$

260,092

 

Restricted cash and cash equivalents

 

432

 

560

 

Receivables, less uncollectible accounts and return allowances of $44,732 and $33,640 at March 29, 2014 and September 28, 2013, respectively

 

430,547

 

467,976

 

Inventories

 

451,115

 

676,089

 

Income taxes receivable

 

30,302

 

11,747

 

Other current assets

 

70,603

 

46,891

 

Deferred income taxes, net

 

50,243

 

58,137

 

Total current assets

 

2,145,397

 

1,521,492

 

 

 

 

 

 

 

Fixed assets, net

 

1,029,551

 

985,563

 

Intangibles, net

 

389,542

 

435,216

 

Goodwill

 

759,531

 

788,184

 

Deferred income taxes, net

 

146

 

149

 

Other long-term assets

 

38,562

 

30,944

 

 

 

 

 

 

 

Total assets

 

$

4,362,729

 

$

3,761,548

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Current portion of long-term debt

 

$

16,099

 

$

12,929

 

Current portion of capital lease and financing obligations

 

1,833

 

1,760

 

Accounts payable

 

260,412

 

312,170

 

Dividends payable

 

40,483

 

 

Accrued expenses

 

219,744

 

242,427

 

Deferred income taxes, net

 

254

 

233

 

Other current liabilities

 

15,432

 

27,544

 

Total current liabilities

 

554,257

 

597,063

 

 

 

 

 

 

 

Long-term debt, less current portion

 

150,766

 

160,221

 

Capital lease and financing obligations, less current portion

 

100,424

 

76,061

 

Deferred income taxes, net

 

245,571

 

252,867

 

Other long-term liabilities

 

25,976

 

28,721

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Redeemable noncontrolling interests

 

10,865

 

11,045

 

 

 

 

 

 

 

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 - 161,933,197 and 150,265,809 shares at March 29, 2014 and September 28, 2013, respectively

 

16,193

 

15,026

 

Additional paid-in capital

 

1,836,860

 

1,387,322

 

Retained earnings

 

1,474,410

 

1,252,407

 

Accumulated other comprehensive loss

 

(52,593

)

(19,185

)

Total stockholders’ equity

 

3,274,870

 

2,635,570

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

4,362,729

 

$

3,761,548

 

 

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

 

2



Table of Contents

 

KEURIG GREEN MOUNTAIN, INC.

Unaudited Consolidated Statements of Operations

(Dollars in thousands, except per share data)

 

 

 

Thirteen weeks ended

 

Twenty-six weeks ended

 

 

 

March 29,
 2014

 

March 30,
 2013

 

March 29,
 2014

 

March 30,
 2013

 

Net sales

 

$

1,103,072

 

$

1,004,792

 

$

2,489,742

 

$

2,343,851

 

Cost of sales

 

645,640

 

589,646

 

1,568,263

 

1,509,542

 

Gross profit

 

457,432

 

415,146

 

921,479

 

834,309

 

 

 

 

 

 

 

 

 

 

 

Selling and operating expenses

 

125,005

 

124,781

 

293,220

 

296,626

 

General and administrative expenses

 

71,941

 

78,261

 

141,147

 

143,138

 

Operating income

 

260,486

 

212,104

 

487,112

 

394,545

 

 

 

 

 

 

 

 

 

 

 

Other income, net

 

1,253

 

227

 

1,682

 

415

 

Gain on financial instruments, net

 

2,900

 

3,471

 

7,461

 

4,575

 

Loss on foreign currency, net

 

(8,722

)

(6,115

)

(19,272

)

(8,794

)

Interest expense

 

(2,995

)

(3,814

)

(5,615

)

(9,544

)

Income before income taxes

 

252,922

 

205,873

 

471,368

 

381,197

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

(90,609

)

(73,302

)

(170,580

)

(140,681

)

Net income

 

$

162,313

 

$

132,571

 

$

300,788

 

$

240,516

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to noncontrolling interests

 

229

 

150

 

477

 

512

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to Keurig

 

$

162,084

 

$

132,421

 

$

300,311

 

$

240,004

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to Keurig per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

1.05

 

$

0.89

 

$

1.98

 

$

1.61

 

Diluted

 

$

1.03

 

$

0.87

 

$

1.94

 

$

1.57

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared per common share

 

$

0.25

 

$

 

$

0.50

 

$

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

153,945,441

 

148,774,443

 

151,552,422

 

149,044,980

 

Diluted

 

157,463,096

 

152,310,053

 

154,525,749

 

152,550,160

 

 

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

 

3



Table of Contents

 

KEURIG GREEN MOUNTAIN, INC.

Unaudited Consolidated Statements of Comprehensive Income

(Dollars in thousands)

 

 

 

Thirteen weeks ended

 

Thirteen weeks ended

 

 

 

March 29, 2014

 

March 30, 2013

 

 

 

Pre-tax

 

Tax (expense)
benefit

 

After-tax

 

Pre-tax

 

Tax (expense)
benefit

 

After-tax

 

Net income

 

 

 

 

 

$

162,313

 

 

 

 

 

$

132,571

 

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains arising during the period

 

$

18,887

 

$

(7,613

)

$

11,274

 

$

588

 

$

(237

)

$

351

 

Losses reclassified to net income

 

1,167

 

(479

)

688

 

379

 

(153

)

226

 

Foreign currency translation adjustments

 

(20,748

)

 

(20,748

)

(13,038

)

 

(13,038

)

Other comprehensive loss

 

$

(694

)

$

(8,092

)

$

(8,786

)

$

(12,071

)

$

(390

)

$

(12,461

)

Total comprehensive income

 

 

 

 

 

153,527

 

 

 

 

 

120,110

 

Total comprehensive loss attributable to noncontrolling interests

 

 

 

 

 

(218

)

 

 

 

 

(164

)

Total comprehensive income attributable to Keurig

 

 

 

 

 

$

153,745

 

 

 

 

 

$

120,274

 

 

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

 

4



Table of Contents

 

KEURIG GREEN MOUNTAIN, INC.

Unaudited Consolidated Statements of Comprehensive Income

(Dollars in thousands)

 

 

 

Twenty-six weeks ended

 

Twenty-six weeks ended

 

 

 

March 29, 2014

 

March 30, 2013

 

 

 

Pre-tax

 

Tax (expense)
benefit

 

After-tax

 

Pre-tax

 

Tax (expense)
benefit

 

After-tax

 

Net income

 

 

 

 

 

$

300,788

 

 

 

 

 

$

240,516

 

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains arising during the period

 

$

18,256

 

$

(7,333

)

$

10,923

 

$

722

 

$

(291

)

$

431

 

Losses reclassified to net income

 

1,442

 

(581

)

861

 

728

 

(294

)

434

 

Foreign currency translation adjustments

 

(46,244

)

 

(46,244

)

(21,355

)

 

(21,355

)

Other comprehensive loss

 

$

(26,546

)

$

(7,914

)

$

(34,460

)

$

(19,905

)

$

(585

)

$

(20,490

)

Total comprehensive income

 

 

 

 

 

266,328

 

 

 

 

 

220,026

 

Total comprehensive (loss) income attributable to noncontrolling interests

 

 

 

 

 

(576

)

 

 

 

 

1

 

Total comprehensive income attributable to Keurig

 

 

 

 

 

$

266,904

 

 

 

 

 

$

220,025

 

 

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

 

5



Table of Contents

 

KEURIG GREEN MOUNTAIN, INC.

Unaudited Consolidated Statement of Changes in Stockholders’ Equity

For the Twenty-six Weeks Ended March 29, 2014

(Dollars in thousands)

 

 

 

Common stock

 

 

 

 

 

 

 

 

 

 

 

Shares

 

Amount

 

Additional paid-
in capital

 

Retained
earnings

 

Accumulated
other
comprehensive
loss

 

Stockholders’
equity

 

Balance at September 28, 2013

 

150,265,809

 

$

15,026

 

$

1,387,322

 

$

1,252,407

 

$

(19,185

)

$

2,635,570

 

Sale of common stock

 

16,684,139

 

1,668

 

1,241,360

 

 

 

1,243,028

 

Options exercised

 

1,458,195

 

146

 

19,348

 

 

 

19,494

 

Issuance of common stock under employee stock purchase plan

 

108,115

 

11

 

6,936

 

 

 

6,947

 

Restricted stock awards and units

 

27,030

 

3

 

(3

)

 

 

 

Repurchase of common stock

 

(6,610,091

)

(661

)

(880,155

)

 

 

(880,816

)

Stock compensation expense

 

 

 

15,719

 

 

 

15,719

 

Tax benefit from equity-based compensation plans

 

 

 

46,170

 

 

 

46,170

 

Deferred compensation expense

 

 

 

163

 

 

 

163

 

Adjustment of redeemable noncontrolling interests to redemption value

 

 

 

 

(605

)

 

(605

)

Other comprehensive loss, net of tax

 

 

 

 

 

(33,408

)

(33,408

)

Net income attributable to Keurig

 

 

 

 

300,311

 

 

300,311

 

Cash dividends declared

 

 

 

 

(77,703

)

 

(77,703

)

Balance at March 29, 2014

 

161,933,197

 

$

16,193

 

$

1,836,860

 

$

1,474,410

 

$

(52,593

)

$

3,274,870

 

 

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

 

6



Table of Contents

 

KEURIG GREEN MOUNTAIN, INC.

Unaudited Consolidated Statements of Cash Flows

(Dollars in thousands)

 

 

 

Twenty-six

 

Twenty-six

 

 

 

weeks ended

 

weeks ended

 

 

 

March 29,
 2014

 

March 30,
 2013

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

300,788

 

$

240,516

 

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

 

 

 

 

 

Depreciation and amortization of fixed assets

 

104,222

 

87,820

 

Amortization of intangibles

 

21,942

 

22,939

 

Amortization of deferred financing fees

 

2,826

 

3,025

 

Unrealized loss on foreign currency, net

 

18,089

 

7,178

 

(Gain) loss on disposal of fixed assets

 

(842

)

241

 

Provision for doubtful accounts

 

1,575

 

(15

)

Provision for sales returns

 

51,747

 

58,812

 

Gain on derivatives, net

 

(9,954

)

(3,847

)

Excess tax benefits from equity-based compensation plans

 

(46,170

)

(9,563

)

Deferred income taxes

 

(80

)

2,901

 

Deferred compensation and stock compensation

 

15,882

 

15,214

 

Other

 

(196

)

449

 

Changes in assets and liabilities:

 

 

 

 

 

Receivables

 

(20,697

)

(9,827

)

Inventories

 

219,417

 

177,665

 

Income tax receivable/payable, net

 

27,408

 

19,237

 

Other current assets

 

3,051

 

(7,861

)

Other long-term assets, net

 

(498

)

3,371

 

Accounts payable and accrued expenses

 

(83,137

)

3,721

 

Other current liabilities

 

(9,133

)

(137

)

Other long-term liabilities

 

(2,620

)

(7,154

)

Net cash provided by operating activities

 

593,620

 

604,685

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Change in restricted cash

 

128

 

3,013

 

Capital expenditures for fixed assets

 

(118,978

)

(148,349

)

Purchase of long-term investment

 

(10,000

)

 

Other investing activities

 

1,207

 

231

 

Net cash used in investing activities

 

(127,643

)

(145,105

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Net change in revolving line of credit

 

 

(184,949

)

Proceeds from sale of common stock

 

1,243,028

 

 

Proceeds from issuance of common stock under compensation plans

 

26,441

 

9,334

 

Repurchase of common stock

 

(880,816

)

(125,681

)

Excess tax benefits from equity-based compensation plans

 

46,170

 

9,563

 

Payments on capital lease and financing obligations

 

(954

)

(1,547

)

Repayment of long-term debt

 

(6,517

)

(3,391

)

Dividends paid

 

(37,220

)

 

Other financing activities

 

(180

)

(549

)

Net cash provided by (used in) financing activities

 

389,952

 

(297,220

)

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

(3,866

)

521

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

852,063

 

162,881

 

Cash and cash equivalents at beginning of period

 

260,092

 

58,289

 

Cash and cash equivalents at end of period

 

$

1,112,155

 

$

221,170

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

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

 

$

43,431

 

$

21,437

 

Dividends declared not paid at the end of each period

 

$

40,483

 

$

 

Noncash investing and financing activities:

 

 

 

 

 

Fixed assets acquired under capital lease and financing obligations

 

$

25,390

 

$

11,769

 

Settlement of acquisition related liabilities through release of restricted cash

 

$

 

$

9,227

 

 

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

 

7



Table of Contents

 

Keurig Green Mountain, Inc.

Notes to Unaudited Consolidated Financial Statements

 

1.               Basis of Presentation

 

Effective March 6, 2014, Green Mountain Coffee Roasters, Inc., changed its name to Keurig Green Mountain, Inc., (referred to together with its subsidiaries, the “Company” or “Keurig”).

 

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.

 

The September 28, 2013 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 Keurig’s Annual Report on Form 10-K, as amended, for the fiscal year ended September 28, 2013.  Throughout these consolidated unaudited financial statements and footnotes, unless otherwise noted, the information provided is on a consolidated basis.

 

In the opinion of management, all adjustments considered necessary for a fair presentation of the interim financial data have been included.  Interim results may not be indicative of results for a full year.  Historically, in addition to variations resulting from the holiday season, sales may vary from quarter-to-quarter due to a variety of other factors including, but not limited to, the cost of green coffee, competitor initiatives, marketing programs and weather.

 

2.               Recent Accounting Pronouncements

 

In April 2014, the Financial Accounting Standards Board, (“FASB”) issued an Accounting Standards Update (“ASU”) No. 2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which raises the threshold for disposals to qualify as discontinued operations.  A discontinued operation is defined as: (1) a component of an entity or group of components that has been disposed of or classified as held for sale and represents a strategic shift that has or will have a major effect on an entity’s operations and financial results; or (2) an acquired business that is classified as held for sale on the acquisition date.  ASU 2014-08 also requires additional disclosures regarding discontinued operations, as well as material disposals that do not meet the definition of discontinued operations.  It is effective for annual periods beginning on or after December 15, 2014.  Early adoption is permitted but only for disposals that have not been reported in financial statements previously issued.  The adoption of ASU 2014-08 is not expected to have a material impact on the Company’s net income, financial position or cash flows.

 

In July 2013, the FASB issued ASU No. 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists” (“ASU 2013-11”).  ASU 2013-11 was issued to eliminate diversity in practice regarding the presentation of unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists.  Under ASU 2013-11, an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward.  Otherwise, to the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets.  The amendments in this ASU will become effective for the Company beginning in fiscal 2015.  The adoption of ASU 2013-11 is not expected to have a material impact on the Company’s net income, financial position or cash flows.

 

In March 2013, the FASB issued 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 will become effective for the Company beginning in fiscal 2015.  The adoption of ASU 2013-05 is not expected to have a material impact on the Company’s net income, financial position or cash flows.

 

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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 will become effective for the Company beginning in fiscal 2015.  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.

 

3.     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 the Canadian business unit.  Effective as of and as initially disclosed on May 8, 2013, the Company’s Board of Directors authorized and approved a reorganization which consolidated U.S. operations to bring greater organizational efficiency and coordination across the Company.  Due to this combination, the results of U.S. operations, formerly reported in the SCBU and KBU segments, are reported in one segment (“Domestic”), and the results of Canadian operations are reported in the “Canada” segment.

 

As a result of the consolidation of U.S. operations, the Company has recast all historical segment results in order to: (i) provide data that is on a basis consistent with the Company’s new structure; (ii) remove total assets from the Company’s segment disclosures as only consolidated asset information is provided to and used by the Company’s chief operating decision maker (“CODM”) for use in decision making (in connection with the reorganization, segment asset information is neither provided to nor used by the CODM); and (iii) reflect all sustainability expenses in Corporate as the Company no longer allocates these expenses to its operating segments.

 

The Company’s Chief Executive Officer (“CEO”) serves as the Company’s CODM and there are two operating and reportable segments, Domestic and Canada.

 

The Domestic segment designs and sells single cup brewers and accessories and sources, produces and sells coffee, hot cocoa, teas and other beverages in K-Cup ® ,  Vue ®  and Rivo ®  packs (“packs”), and coffee in more traditional packaging, including bags and fractional packs, to retailers, including supermarkets, department stores, mass merchandisers, club stores, and convenience stores; to restaurants, hospitality accounts, office coffee distributors, and partner brand owners; and to consumers through Company websites.  The Domestic segment primarily distributes its products in the at-home (“AH”) and away-from-home (“AFH”) channels, as well as to consumers through Company websites.  Substantially all of the Domestic segment’s distribution to major retailers is processed by fulfillment entities which receive and fulfill sales orders and invoice certain retailers primarily in the AH channel.  The Domestic segment also earns royalty income from licensees under various licensing agreements.

 

The Canada segment sells single cup brewers and accessories, and sources, produces and sells coffee and teas and other beverages in packs and coffee in more traditional packaging, including bags, cans and fractional packs, under a variety of brands to retailers, including supermarkets, department stores, mass merchandisers, club stores, through office coffee services to offices, convenience stores, restaurants, hospitality accounts, and to consumers through its website.

 

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 both the Domestic and Canada segments, and 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.  Expenses consisting primarily of compensation and depreciation related to certain centralized administrative functions, including information system technology, are allocated to the operating segments.  Expenses not specifically related to an operating segment are presented under “Corporate Unallocated.”  Corporate Unallocated 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 Unallocated expenses also include depreciation for corporate headquarters, corporate sustainability expenses, interest expense not directly attributable to an operating segment, the majority of foreign exchange gains or losses, legal expenses, and compensation of the Board of Directors.

 

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The following tables summarize selected financial data for segment disclosures for the thirteen and twenty-six weeks ended March 29, 2014 and March 30, 2013:

 

 

 

Thirteen weeks ended March 29, 2014

 

 

 

(Dollars in thousands)

 

 

 

Domestic

 

Canada

 

Corporate-
Unallocated

 

Consolidated

 

Net sales

 

$

970,268

 

$

132,804

 

$

 

$

1,103,072

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

$

278,030

 

$

20,758

 

$

(38,302

)

$

260,486

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

$

49,655

 

$

15,275

 

$

2,086

 

$

67,016

 

 

 

 

 

 

 

 

 

 

 

Stock compensation

 

$

3,945

 

$

730

 

$

3,962

 

$

8,637

 

 

 

 

Thirteen weeks ended March 30, 2013

 

 

 

(Dollars in thousands)

 

 

 

Domestic

 

Canada

 

Corporate-
Unallocated

 

Consolidated

 

Net sales

 

$

865,595

 

$

139,197

 

$

 

$

1,004,792

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

$

239,931

 

$

20,239

 

$

(48,066

)

$

212,104

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

$

38,600

 

$

16,279

 

$

535

 

$

55,414

 

 

 

 

 

 

 

 

 

 

 

Stock compensation

 

$

2,674

 

$

930

 

$

5,358

 

$

8,962

 

 

 

 

Twenty-six weeks ended March 29, 2014

 

 

 

(Dollars in thousands)

 

 

 

Domestic

 

Canada

 

Corporate-
Unallocated

 

Consolidated

 

Net Sales

 

$

2,162,134

 

$

327,608

 

$

 

$

2,489,742

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

$

510,830

 

$

52,731

 

$

(76,449

)

$

487,112

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

$

89,781

 

$

31,963

 

$

4,420

 

$

126,164

 

 

 

 

 

 

 

 

 

 

 

Stock compensation

 

$

7,651

 

$

1,760

 

$

6,308

 

$

15,719

 

 

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Table of Contents

 

 

 

Twenty-six weeks ended March 30, 2013

 

 

 

(Dollars in thousands)

 

 

 

Domestic

 

Canada

 

Corporate-
Unallocated

 

Consolidated

 

Net Sales

 

$

1,997,530

 

$

346,321

 

$

 

$

2,343,851

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

$

430,948

 

$

46,197

 

$

(82,600

)

$

394,545

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

$

77,592

 

$

32,437

 

$

730

 

$

110,759

 

 

 

 

 

 

 

 

 

 

 

Stock compensation

 

$

5,193

 

$

1,355

 

$

8,524

 

$

15,072

 

 

The following table reconciles operating segments and corporate-unallocated operating income (loss) 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 29, 2014

 

March 30, 2013

 

March 29, 2014

 

March 30, 2013

 

Operating income

 

$

260,486

 

$

212,104

 

$

487,112

 

$

394,545

 

Other income, net

 

1,253

 

227

 

1,682

 

415

 

Gain on financial instruments, net

 

2,900

 

3,471

 

7,461

 

4,575

 

Loss on foreign currency, net

 

(8,722

)

(6,115

)

(19,272

)

(8,794

)

Interest expense

 

(2,995

)

(3,814

)

(5,615

)

(9,544

)

Income before income taxes

 

$

252,922

 

$

205,873

 

$

471,368

 

$

381,197

 

 

4.               Inventories

 

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

 

 

 

March 29,
 2014

 

September 28,
 2013

 

Raw materials and supplies

 

$

146,327

 

$

182,882

 

Finished goods

 

304,788

 

493,207

 

 

 

$

451,115

 

$

676,089

 

 

At March 29, 2014, the Company had approximately $409.2 million in green coffee purchase commitments, of which approximately 81% had a fixed price.  These commitments primarily extend through fiscal 2016.  The value of the variable portion of these commitments was calculated using an average “C” price of coffee of $1.85 per pound at March 29, 2014.  In addition to its green coffee commitments, the Company had approximately $213.9 million in fixed price brewer and related accessory purchase commitments and $1,171.2 million in production raw material commitments at March 29, 2014.  The Company believes, based on relationships established with its suppliers, that the risk of non-delivery on such purchase commitments is remote.

 

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As of March 29, 2014, minimum future inventory purchase commitments were as follows (in thousands):

 

Fiscal Year

 

Inventory
Purchase Obligations

 

Remainder of 2014

 

$

551,486

 

2015

 

385,470

 

2016

 

262,503

 

2017

 

266,950

 

2018

 

283,812

 

Thereafter

 

44,043

 

 

 

$

1,794,264

 

 

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5.               Fixed Assets

 

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

 

 

 

Useful Life in Years

 

March 29,
2014

 

September 28,
2013

 

Production equipment

 

1-15

 

$

708,730

 

$

680,457

 

Coffee service equipment

 

3-7

 

58,494

 

59,169

 

Computer equipment and software

 

1-7

 

160,152

 

146,246

 

Land

 

Indefinite

 

11,204

 

11,520

 

Building and building improvements

 

4-30

 

144,596

 

134,495

 

Furniture and fixtures

 

1-15

 

30,764

 

33,975

 

Vehicles

 

4-5

 

12,052

 

11,786

 

Leasehold improvements

 

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

 

99,204

 

98,990

 

Assets acquired under capital leases

 

15

 

41,200

 

41,200

 

Construction-in-progress

 

 

 

277,998

 

202,940

 

Total fixed assets

 

 

 

$

1,544,394

 

$

1,420,778

 

Accumulated depreciation and amortization

 

 

 

(514,843

)

(435,215

)

 

 

 

 

$

1,029,551

 

$

985,563

 

 

Assets acquired under capital leases, net of accumulated amortization, were $35.5 million and $36.9 million at March 29, 2014 and September 28, 2013, respectively.

 

Total depreciation and amortization expense relating to all fixed assets was $56.2 million and $44.0 million for the thirteen weeks ended March 29, 2014 and March 30, 2013, respectively.  Total depreciation and amortization expense relating to all fixed assets was $104.2 million and $87.8 million for the twenty-six weeks ended March 29, 2014 and March 30, 2013, respectively.

 

As of March 29, 2014, construction-in-progress includes $46.5 million relating to properties under construction where the Company is deemed to be the accounting owner, even though the Company is not the legal owner.

 

6.               Goodwill and Intangible Assets

 

The following represented the change in the carrying amount of goodwill by segment for the twenty-six weeks ended March 29, 2014 (in thousands):

 

 

 

Domestic

 

Canada

 

Total

 

Balance at September 28, 2013

 

$

369,353

 

$

418,831

 

$

788,184

 

Foreign currency effect

 

 

(28,653

)

(28,653

)

Balance at March 29, 2014

 

$

369,353

 

$

390,178

 

$

759,531

 

 

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

 

 

 

March 29, 2014

 

September 28, 2013

 

Trade names

 

$

91,053

 

$

97,740

 

 

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Intangible Assets Subject to Amortization

 

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

 

 

 

 

 

March 29, 2014

 

September 28, 2013

 

 

 

Useful Life in
Years

 

Gross Carrying
Amount

 

Accumulated
Amortization

 

Gross Carrying
Amount

 

Accumulated
Amortization

 

Acquired technology

 

4-10

 

$

21,589

 

$

(17,955

)

$

21,609

 

$

(17,123

)

Customer and roaster agreements

 

8-11

 

26,479

 

(21,080

)

26,977

 

(19,750

)

Customer relationships

 

2-16

 

392,991

 

(124,794

)

414,967

 

(113,061

)

Trade names

 

9-11

 

36,048

 

(14,789

)

37,200

 

(13,353

)

Non-compete agreements

 

2-5

 

374

 

(374

)

374

 

(364

)

Total

 

 

 

$

477,481

 

$

(178,992

)

$

501,127

 

$

(163,651

)

 

Definite-lived intangible assets are amortized on a straight-line basis over the period of expected economic benefit.  Total amortization expense was $10.7 million and $11.4 million for the thirteen weeks ended March 29, 2014 and March 30, 2013, respectively.  Total amortization expense was $21.9 million and $22.9 million for the twenty-six weeks ended March 29, 2014 and March 30, 2013, respectively.

 

The estimated aggregate amortization expense for the remainder of fiscal 2014, for each of the next five years and thereafter, is as follows (in thousands):

 

Fiscal Year

 

Amortization Expense

 

Remainder of 2014

 

$

21,111

 

2015

 

40,777

 

2016

 

40,051

 

2017

 

38,656

 

2018

 

38,656

 

2019

 

38,506

 

Thereafter

 

80,732

 

 

7.              Product Warranties

 

The Company offers a one-year warranty on all Keurig ®  Single Cup brewers it sells.  The Company provides for the estimated cost of product warranties, primarily using historical information and repair or replacement costs, at the time product revenue is recognized.  Brewer failures may arise in the later part of the warranty period, and actual warranty costs may exceed the reserve. 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.

 

The changes in the carrying amount of product warranties for the thirteen and twenty-six weeks ended March 29, 2014 and March 30, 2013 are as follows (in thousands):

 

 

 

Thirteen weeks ended

 

Twenty-six weeks ended

 

 

 

March 29, 2014

 

March 30, 2013

 

March 29, 2014

 

March 30, 2013

 

Balance, beginning of period

 

$

12,791

 

$

24,356

 

$

7,804

 

$

20,218

 

Provision related to current period

 

4,834

 

1,833

 

15,064

 

16,054

 

Change in estimate

 

(2,425

)

(5,638

)

(2,483

)

(8,868

)

Usage

 

(6,675

)

(6,095

)

(11,860

)

(12,948

)

Balance, end of period

 

$

8,525

 

$

14,456

 

$

8,525

 

$

14,456

 

 

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For the thirteen and twenty-six weeks ended March 29, 2014, the Company recorded recoveries of $0.2 million and $0.7 million, respectively.  For the thirteen and twenty-six weeks ended March 30, 2013 the Company recorded recoveries of $0.3 million and $0.6 million.  The recoveries are under agreements with suppliers and are recorded as a reduction of warranty expense.  The recoveries are not reflected in the provision charged to income in the table above.

 

8.               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 current 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 29, 2014 are as follows (in thousands):

 

 

 

Liability attributable to
mandatorily redeemable
noncontrolling interests

 

Equity attributable
to redeemable
noncontrolling interests

 

Balance at September 28, 2013

 

$

4,934

 

$

11,045

 

Net income

 

207

 

270

 

Adjustment to redemption value

 

(196

)

605

 

Cash distributions

 

(255

)

(328

)

Other comprehensive loss

 

(326

)

(727

)

Balance at March 29, 2014

 

$

4,364

 

$

10,865

 

 

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9.               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, commodity price risk and foreign currency exchange rate risk.  The Company uses interest rate swaps to mitigate interest rate risk associated with the Company’s variable-rate borrowings, 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, and uses foreign currency forward contracts to hedge the purchase and payment of green coffee purchase commitments denominated in non-functional currencies.

 

The Company designates these contracts as cash flow hedges and measures the effectiveness of these derivative instruments at each balance sheet date.  The effective portion of the derivatives’ gains or losses, resulting from changes in the fair value of these instruments is classified in accumulated other comprehensive income (loss), net of related tax effects and is reclassified from other comprehensive income (“OCI”) into earnings in the same period or periods during which the hedged transaction affects earnings.  Any ineffective portion of the derivatives’ gains or losses is recognized in earnings in the period such ineffectiveness occurs.  If it is determined that a derivative is not highly effective, the gain or loss is reclassified into earnings.

 

Fair Value Hedges

 

The Company occasionally 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 29, 2014, the Company has approximately two years remaining on a CDN $90.0 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 29, 2014 was $0.3 million and $0.7 million, respectively. 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.

 

The Company occasionally enters into foreign currency forward contracts and coffee futures contracts that qualify as derivatives, and 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.

 

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

 

 

 

March 29, 2014

 

September 28, 2013

 

Balance Sheet Classification

 

Derivatives designated as cash flow hedges:

 

 

 

 

 

 

 

Interest rate swaps

 

$

(4,799

)

$

(6,004

)

Other current liabilities

 

Coffee futures

 

16,901

 

 

Other current assets

 

Coffee futures

 

 

(3,809

)

Other current liabilities

 

Foreign currency forward contracts

 

 

(141

)

Other current liabilities

 

Foreign currency forward contracts

 

 

13

 

Other current assets

 

 

 

$

12,102

 

$

(9,941

)

 

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedges:

 

 

 

 

 

 

 

Cross currency swap

 

$

5,105

 

$

 

Other current assets

 

Cross currency swap

 

 

(1,253

)

Other current liabilities

 

Coffee futures

 

2,285

 

 

Other current assets

 

 

 

$

7,390

 

$

(1,253

)

 

 

 

 

 

 

 

 

 

 

Total

 

$

19,492

 

$

(11,194

)

 

 

 

Offsetting

 

Generally, all of the Company’s derivative instruments are subject to a master netting arrangement under which either party may offset amounts if the payment amounts are for the same transaction and in the same currency.  By election, parties may agree to net other transactions.  In addition, the arrangements provide for the net settlement of all contracts through a single payment in a single currency in the event of default or termination of the contract.  The Company’s policy is to net all derivative assets and liabilities in the accompanying Unaudited Consolidated Balance Sheets when allowable by GAAP.

 

Additionally, the Company has elected to include all derivative assets and liabilities, including those not subject to a master netting arrangement, in the following offsetting tables.

 

Offsetting of financial assets and derivative assets as of March 29, 2014 and September 28, 2013 is as follows (in thousands):

 

 

 

Gross

 

Gross amounts

 

Net amount of
assets presented

 

Gross amounts not offset in the
Consolidated Balance Sheet

 

 

 

 

 

amounts of
recognized
assets

 

offset in the
Consolidated
Balance Sheet

 

in the
Consolidated
Balance Sheet

 

Financial
instruments

 

Cash
collateral
received

 

Net amount

 

Derivative assets, as of March 29, 2014

 

$

24,969

 

$

(678

)

$

24,291

 

$

 

$

 

$

24,291

 

Derivative assets, as of September 28, 2013

 

13

 

 

13

 

 

 

13

 

 

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Offsetting of financial liabilities and derivative liabilities as of March 29, 2014 and September 28, 2013 is as follows (in thousands):

 

 

 

Gross

 

Gross amounts

 

Net amount of
liabilities

 

Gross amounts not offset in the
Consolidated Balance Sheet

 

 

 

 

 

amounts of
recognized
liabilities

 

offset in the
Consolidated
Balance Sheet

 

presented in the
Consolidated
Balance Sheet

 

Financial
instruments

 

Cash
collateral
pledged

 

Net amount

 

Derivative liabilities, as of March 29, 2014

 

$

5,477

 

$

(678

)

$

4,799

 

$

 

$

 

$

4,799

 

Derivative liabilities, as of September 28, 2013

 

11,207

 

 

11,207

 

 

 

11,207

 

 

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

 

 

 

Thirteen weeks ended

 

Twenty-six weeks ended

 

 

 

March 29, 2014

 

March 30, 2013

 

March 29, 2014

 

March 30, 2013

 

Cash Flow Hedges:

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

$

632

 

$

638

 

$

1,206

 

$

1,670

 

Coffee futures

 

18,185

 

(50

)

16,785

 

(948

)

Foreign currency forward contracts

 

70

 

 

265

 

 

Total

 

$

18,887

 

$

588

 

$

18,256

 

$

722

 

 

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

 

 

 

Thirteen weeks ended

 

Twenty-six weeks ended

 

 

 

 

 

March 29,
2014

 

March 30,
2013

 

March 29,
2014

 

March 30,
2013

 

Location of Losses Reclassified
from OCI into Income

 

Coffee futures

 

$

(1,235

)

$

(379

)

$

(1,441

)

$

(728

)

Cost of sales

 

Foreign currency forward contracts

 

45

 

 

1

 

 

Cost of sales

 

Foreign currency forward contracts

 

23

 

 

(2

)

 

Loss on foreign currency, net

 

Total

 

$

(1,167

)

$

(379

)

$

(1,442

)

$

(728

)

 

 

 

The Company expects to reclassify $0.9 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 29, 2014, and March 30, 2014 (in thousands):

 

 

 

Thirteen weeks ended

 

 

 

 

 

March 29, 2014

 

March 30, 2013

 

 

 

 

 

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 on foreign currency, net

 

 

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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 29, 2014, and March 30, 2014 (in thousands):

 

 

 

Twenty-six weeks ended

 

 

 

 

 

March 29, 2014

 

March 30, 2013

 

 

 

 

 

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 on foreign currency, net

 

 

See Note 12, Stockholders’ Equity , for a reconciliation of derivatives in beginning accumulated other comprehensive income (loss) to derivatives in ending accumulated other comprehensive income (loss).

 

Net gains on financial instruments not designated as hedges for accounting purposes are as follows (in thousands):

 

 

 

Thirteen weeks ended

 

Twenty-six weeks ended

 

Location of net gain in

 

 

 

March 29,
2014

 

March 30,
2013

 

March 29,
2014

 

March 30,
2013

 

Unaudited Consolidated
Statements of Operations

 

Net gain on cross currency swap

 

$

2,900

 

$

3,471

 

$

7,461

 

$

4,575

 

Gain on financial instruments, net

 

Net gain on coffee futures

 

4,051

 

 

6,176

 

 

Cost of sales

 

Total

 

$

6,951

 

$

3,471

 

$

13,637

 

$

4,575

 

 

 

 

In addition, for the thirteen and twenty-six weeks ended March 29, 2014, the Company recognized as a cost of sale $1.3 million in net gains representing the ineffective portion on coffee futures designated as cash flow hedges.  No amounts were recognized for the thirteen and twenty-six weeks ended March 30, 2013 for ineffectiveness.

 

10.        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, which include quoted prices for similar assets or liabilities in active markets and quoted prices for identical assets or liabilities in markets that are not active.

 

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

 

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The following table summarizes the fair values and the levels used in fair value measurements as of March 29, 2014 for the Company’s financial assets (liabilities) (in thousands):

 

 

 

Fair Value Measurements Using

 

 

 

Level 1

 

Level 2

 

Level 3

 

Derivatives:

 

 

 

 

 

 

 

Interest rate swaps

 

$

 

$

(4,799

)

$

 

Cross currency swap

 

 

5,105

 

 

Coffee futures

 

 

19,186

 

 

Foreign currency forward contracts

 

 

 

 

Total

 

$

 

$

19,492

 

$

 

 

The following table summarizes the fair values and the levels used in fair value measurements as of September 28, 2013 for the Company’s financial liabilities (in thousands):

 

 

 

Fair Value Measurements Using

 

 

 

Level 1

 

Level 2

 

Level 3

 

Derivatives:

 

 

 

 

 

 

 

Interest rate swaps

 

$

 

$

(6,004

)

$

 

Cross currency swap

 

 

(1,253

)

 

Coffee futures

 

 

(3,809

)

 

Forward currency forward contracts

 

 

(128

)

 

Total

 

$

 

$

(11,194

)

$

 

 

Derivatives

 

Level 2 derivative financial instruments use inputs that are based on market data of identical (or similar) instruments, including forward prices for commodities, interest rate 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 Unaudited Consolidated Statements of Operations for fair value hedges and derivatives that do not qualify for hedge accounting treatment.

 

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

 

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

 

As of March 29, 2014, 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.

 

Long-Term Debt

 

The carrying value of long-term debt was $166.9 million and $173.2 million as of March 29, 2014 and September 28, 2013, respectively.  The inputs to the calculation of the fair value of long-term debt are considered to be Level 2 within the fair value hierarchy, as the measurement of fair value is based on the net present value of calculated interest and principal payments, using an interest rate derived from a fair market yield curve adjusted for the Company’s credit rating.  The carrying value of long-term debt approximates fair value as the interest rate on the debt is based on variable interest rates that reset every 30 days.

 

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Long-Term Investment