Keurig Green Mountain, Inc.
GREEN MOUNTAIN COFFEE ROASTERS INC (Form: 10-Q, Received: 02/05/2014 17:28:41)

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 December 28, 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 January 29, 2014, 148,890,944 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 December 28, 2013

 

Table of Conte nts

 

 

 

Page

PART I. FINANCIAL INFORMATION

1

Item 1.

Financial Statements

1

 

Unaudited Consolidated Balance Sheets

1

 

Unaudited Consolidated Statements of Operations

2

 

Unaudited Consolidated Statements of Comprehensive Income

3

 

Unaudited Consolidated Statement of Changes in Stockholders’ Equity

4

 

Unaudited Consolidated Statements of Cash Flows

5

 

Notes to Unaudited Consolidated Financial Statements

6

Item 2.

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

22

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

34

Item 4.

Controls and Procedures

35

 

 

 

PART II. OTHER INFORMATION

37

Item 1.

Legal Proceedings

37

Item 1A.

Risk Factors

39

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

39

Item 6.

Exhibits

40

Signatures

 

41

 



Table of Contents

 

Part I.  Financial Information

Item 1.  Financial Statements

 

GREEN MOUNTAIN COFFEE ROASTERS, INC.

Unaudited Consolidated Balance Sheets

(Dollars in thousands, except per share data)

 

 

 

December 28,
2013

 

September 28,
2013

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

348,665

 

$

260,092

 

Restricted cash and cash equivalents

 

1,097

 

560

 

Receivables, less uncollectible accounts and return allowances of $54,240 and $33,640 at December 28, 2013 and September 28, 2013, respectively

 

525,148

 

467,976

 

Inventories

 

467,344

 

676,089

 

Income taxes receivable

 

14,986

 

11,747

 

Other current assets

 

55,017

 

46,891

 

Deferred income taxes, net

 

58,343

 

58,137

 

Total current assets

 

1,470,600

 

1,521,492

 

 

 

 

 

 

 

Fixed assets, net

 

996,246

 

985,563

 

Intangibles, net

 

410,877

 

435,216

 

Goodwill

 

772,347

 

788,184

 

Deferred income taxes, net

 

148

 

149

 

Other long-term assets

 

29,890

 

30,944

 

 

 

 

 

 

 

Total assets

 

$

3,680,108

 

$

3,761,548

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Current portion of long-term debt

 

$

14,552

 

$

12,929

 

Current portion of capital lease and financing obligations

 

1,802

 

1,760

 

Accounts payable

 

241,806

 

312,170

 

Dividends payable

 

37,188

 

 

Accrued expenses

 

229,529

 

242,427

 

Deferred income taxes, net

 

262

 

233

 

Other current liabilities

 

20,403

 

27,544

 

Total current liabilities

 

545,542

 

597,063

 

 

 

 

 

 

 

Long-term debt, less current portion

 

155,764

 

160,221

 

Capital lease and financing obligations, less current portion

 

87,705

 

76,061

 

Deferred income taxes, net

 

248,845

 

252,867

 

Other long-term liabilities

 

29,333

 

28,721

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Redeemable noncontrolling interests

 

9,686

 

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 - 148,750,531 and 150,265,809 shares at December 28, 2013 and September 28, 2013, respectively

 

14,875

 

15,026

 

Additional paid-in capital

 

1,278,288

 

1,387,322

 

Retained earnings

 

1,354,323

 

1,252,407

 

Accumulated other comprehensive loss

 

(44,253

)

(19,185

)

Total stockholders’ equity

 

2,603,233

 

2,635,570

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

3,680,108

 

$

3,761,548

 

 

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

 

1



Table of Contents

 

GREEN MOUNTAIN COFFEE ROASTERS, INC.

Unaudited Consolidated Statements of Operations

(Dollars in thousands, except per share data)

 

 

 

Thirteen weeks ended

 

 

 

December 28,
2013

 

December 29,
2012

 

Net sales

 

$

1,386,670

 

$

1,339,059

 

Cost of sales

 

922,623

 

919,896

 

Gross profit

 

464,047

 

419,163

 

 

 

 

 

 

 

Selling and operating expenses

 

168,215

 

171,845

 

General and administrative expenses

 

69,206

 

64,877

 

Operating income

 

226,626

 

182,441

 

 

 

 

 

 

 

Other income, net

 

429

 

188

 

Gain on financial instruments, net

 

4,561

 

1,104

 

Loss on foreign currency, net

 

(10,550

)

(2,679

)

Interest expense

 

(2,620

)

(5,730

)

Income before income taxes

 

218,446

 

175,324

 

 

 

 

 

 

 

Income tax expense

 

(79,971

)

(67,379

)

Net income

 

$

138,475

 

$

107,945

 

 

 

 

 

 

 

Net income attributable to noncontrolling interests

 

248

 

362

 

 

 

 

 

 

 

Net income attributable to GMCR

 

$

138,227

 

$

107,583

 

 

 

 

 

 

 

Net income attributable to GMCR per common share:

 

 

 

 

 

Basic

 

$

0.93

 

$

0.72

 

Diluted

 

$

0.91

 

$

0.70

 

 

 

 

 

 

 

Cash dividends declared per common share

 

$

0.25

 

$

 

 

 

 

 

 

 

Weighted-average common shares outstanding:

 

 

 

 

 

Basic

 

149,162,600

 

149,317,597

 

Diluted

 

151,581,897

 

152,708,807

 

 

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

 

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Table of Contents

 

GREEN MOUNTAIN COFFEE ROASTERS, INC.

Unaudited Consolidated Statements of Comprehensive Income

(Dollars in thousands)

 

 

 

Thirteen weeks ended

 

Thirteen weeks ended

 

 

 

December 28, 2013

 

December 29, 2012

 

 

 

Pre-tax

 

Tax (expense) 
benefit

 

After-tax

 

Pre-tax

 

Tax (expense) 
benefit

 

After-tax

 

Net income

 

 

 

 

 

$

138,475

 

 

 

 

 

$

107,945

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized (losses) gains arising during the period

 

$

(631

)

$

280

 

$

(351

)

$

134

 

$

(54

)

$

80

 

Losses reclassified to net income

 

275

 

(102

)

173

 

349

 

(141

)

208

 

Foreign currency translation adjustments

 

(25,496

)

 

(25,496

)

(8,317

)

 

(8,317

)

Other comprehensive (loss) income

 

$

(25,852

)

$

178

 

$

(25,674

)

$

(7,834

)

$

(195

)

$

(8,029

)

Total comprehensive income

 

 

 

 

 

112,801

 

 

 

 

 

99,916

 

Total comprehensive (loss) income attributable to noncontrolling interests

 

 

 

 

 

(358

)

 

 

 

 

165

 

Total comprehensive income attributable to GMCR

 

 

 

 

 

$

113,159

 

 

 

 

 

$

99,751

 

 

 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 Statement of Changes in Stockholders’ Equity

For the Thirteen Weeks Ended December 28, 2013

(Dollars in thousands)

 

 

 

Common stock

 

Additional paid-in

 

Retained

 

Accumulated
other
comprehensive

 

Stockholders’

 

 

 

Shares

 

Amount

 

capital

 

earnings

 

loss

 

equity

 

Balance at September 28, 2013

 

150,265,809

 

$

15,026

 

$

1,387,322

 

$

1,252,407

 

$

(19,185

)

$

2,635,570

 

Options exercised

 

201,923

 

20

 

1,663

 

 

 

1,683

 

Restricted stock awards and units

 

8,282

 

1

 

(1

)

 

 

 

Repurchase of common stock

 

(1,725,483

)

(172

)

(122,292

)

 

 

(122,464

)

Stock compensation expense

 

 

 

7,082

 

 

 

7,082

 

Tax benefit from equity-based compensation plans

 

 

 

4,509

 

 

 

4,509

 

Deferred compensation expense

 

 

 

5

 

 

 

5

 

Adjustment of redeemable noncontrolling interests to redemption value

 

 

 

 

877

 

 

877

 

Other comprehensive loss, net of tax

 

 

 

 

 

(25,068

)

(25,068

)

Net income

 

 

 

 

138,227

 

 

138,227

 

Cash dividends declared

 

 

 

 

(37,188

)

 

(37,188

)

Balance at December 28, 2013

 

148,750,531

 

$

14,875

 

$

1,278,288

 

$

1,354,323

 

$

(44,253

)

$

2,603,233

 

 

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 Cash Flows

(Dollars in thousands)

 

 

 

Thirteen

 

Thirteen

 

 

 

weeks ended

 

weeks ended

 

 

 

December 28,
2013

 

December 29,
2012

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

138,475

 

$

107,945

 

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

 

 

 

 

 

Depreciation and amortization of fixed assets

 

47,996

 

43,810

 

Amortization of intangibles

 

11,152

 

11,535

 

Amortization of deferred financing fees

 

1,413

 

1,513

 

Unrealized loss on foreign currency, net

 

11,932

 

2,640

 

(Gain) loss on disposal of fixed assets

 

(983

)

16

 

Provision for doubtful accounts

 

862

 

668

 

Provision for sales returns

 

38,237

 

44,809

 

Gain on derivatives, net

 

(6,830

)

(755

)

Excess tax benefits from equity-based compensation plans

 

(4,509

)

(2,975

)

Deferred income taxes

 

(33

)

2,934

 

Deferred compensation and stock compensation

 

7,087

 

6,165

 

Other

 

(225

)

363

 

Changes in assets and liabilities:

 

 

 

 

 

Receivables

 

(99,310

)

(115,282

)

Inventories

 

205,602

 

179,767

 

Income tax receivable/payable, net

 

1,185

 

11,475

 

Other current assets

 

(3,443

)

(9,635

)

Other long-term assets, net

 

(86

)

1,205

 

Accounts payable and accrued expenses

 

(71,430

)

53,389

 

Other current liabilities

 

(5,094

)

3,514

 

Other long-term liabilities

 

678

 

(5,959

)

Net cash provided by operating activities

 

272,676

 

337,142

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Change in restricted cash

 

(537

)

3,561

 

Capital expenditures for fixed assets

 

(60,822

)

(83,458

)

Other investing activities

 

770

 

100

 

Net cash used in investing activities

 

(60,589

)

(79,797

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Net change in revolving line of credit

 

 

(120,000

)

Proceeds from issuance of common stock under compensation plans

 

1,683

 

1,127

 

Repurchase of common stock

 

(122,464

)

(98,530

)

Excess tax benefits from equity-based compensation plans

 

4,509

 

2,975

 

Payments on capital lease and financing obligations

 

(462

)

(755

)

Repayment of long-term debt

 

(3,154

)

(1,584

)

Other financing activities

 

26

 

(244

)

Net cash used in financing activities

 

(119,862

)

(217,011

)

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

(3,652

)

(98

)

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

88,573

 

40,236

 

Cash and cash equivalents at beginning of period

 

260,092

 

58,289

 

Cash and cash equivalents at end of period

 

$

348,665

 

$

98,525

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

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

 

$

21,112

 

$

36,770

 

Noncash investing and financing activities:

 

 

 

 

 

Fixed assets acquired under capital lease and financing obligations

 

$

12,148

 

$

6,607

 

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.

 

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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.

 

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 the Annual Report on Form 10-K, as amended, for Green Mountain Coffee Roasters, Inc. for the fiscal year ended September 28, 2013.  Throughout this presentation, we refer to the consolidated company as the “Company” and, unless otherwise noted, the information provided is on a consolidated basis.

 

In the opinion of management, all adjustments considered necessary for a fair statement 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 July 2013, the Financial Accounting Standards Board (the “FASB”) issued an Accounting Standards Update (“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.

 

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.

 

6



Table of Contents

 

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.  We have recast all historical segment results in order to provide data that is on a basis consistent with our new structure.

 

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

 

The Domestic segment sells single cup brewers, accessories, and sources, produces and sells coffee, hot cocoa, teas and other beverages in K-Cup ®  and Vue ®  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 K-Cup ®  packs sold by a third-party licensed roaster.

 

The Canada segment sells single cup brewers, 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, 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.  The Company does not disclose assets or property additions by segment as only consolidated asset information is provided to the CODM for use in decision making.

 

The following tables summarize selected financial data for segment disclosures for the thirteen weeks ended December 28, 2013 and December 29, 2012:

 

 

 

Thirteen weeks ended December 28, 2013

 

 

 

(Dollars in thousands)

 

 

 

Domestic

 

Canada

 

Corporate-Unallocated

 

Consolidated

 

Net sales

 

$

1,191,866

 

$

194,804

 

$

 

$

1,386,670

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

$

232,800

 

$

31,973

 

$

(38,147

)

$

226,626

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

$

40,126

 

$

16,688

 

$

2,334

 

$

59,148

 

 

 

 

 

 

 

 

 

 

 

Stock compensation

 

$

3,706

 

$

1,030

 

$

2,346

 

$

7,082

 

 

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Table of Contents

 

 

 

Thirteen weeks ended December 29, 2012

 

 

 

(Dollars in thousands)

 

 

 

Domestic

 

Canada

 

Corporate- Unallocated

 

Consolidated

 

Net sales

 

$

1,131,935

 

$

207,124

 

$

 

$

1,339,059

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

$

191,017

 

$

25,958

 

$

(34,534

)

$

182,441

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

$

38,992

 

$

16,158

 

$

195

 

$

55,345

 

 

 

 

 

 

 

 

 

 

 

Stock compensation

 

$

2,519

 

$

425

 

$

3,166

 

$

6,110

 

 

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

 

 

 

December 28,
 2013

 

December 29, 
2012

 

Operating income

 

$

226,626

 

$

182,441

 

Other income, net

 

429

 

188

 

Gain on financial instruments, net

 

4,561

 

1,104

 

Loss on foreign currency, net

 

(10,550

)

(2,679

)

Interest expense

 

(2,620

)

(5,730

)

Income before income taxes

 

$

218,446

 

$

175,324

 

 

4.               Inventories

 

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

 

 

 

December 28,
2013

 

September 28,
2013

 

Raw materials and supplies

 

$

148,689

 

$

182,882

 

 

 

 

 

 

 

Finished goods

 

318,655

 

493,207

 

 

 

$

467,344

 

$

676,089

 

 

At December 28, 2013, the Company had approximately $268.6 million in green coffee purchase commitments, of which approximately 90% had a fixed price.  These commitments primarily extend through fiscal 2015.  The value of the variable portion of these commitments was calculated using an average “C” price of coffee of $1.21 per pound at December 28, 2013.  In addition to its green coffee commitments, the Company had approximately $117.2 million in fixed price brewer and related accessory purchase commitments and $499.2 million in production raw material commitments at December 28, 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 December 28, 2013, minimum future inventory purchase commitments were as follows (in thousands):

 

Fiscal Year

 

Inventory
Purchase
Obligations

 

Remainder of 2014

 

$

422,817

 

2015

 

125,012

 

2016

 

117,363

 

2017

 

108,485

 

2018

 

111,325

 

 

 

$

885,002

 

 

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5.               Fixed Assets

 

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

 

 

 

Useful Life in Years

 

December 28,
2013

 

September 28,
2013

 

Production equipment

 

1-15

 

$

703,341

 

$

680,457

 

Coffee service equipment

 

3-7

 

58,238

 

59,169

 

Computer equipment and software

 

1-7

 

159,130

 

146,246

 

Land

 

Indefinite

 

11,346

 

11,520

 

Building and building improvements

 

4-30

 

139,696

 

134,495

 

Furniture and fixtures

 

1-15

 

33,249

 

33,975

 

Vehicles

 

4-5

 

11,554

 

11,786

 

Leasehold improvements

 

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

 

99,784

 

98,990

 

Assets acquired under capital leases

 

15

 

41,200

 

41,200

 

Construction-in-progress

 

 

 

215,724

 

202,940

 

Total fixed assets

 

 

 

$

1,473,262

 

$

1,420,778

 

Accumulated depreciation and amortization

 

 

 

(477,016

)

(435,215

)

 

 

 

 

$

996,246

 

$

985,563

 

 

Assets acquired under capital leases, net of accumulated amortization, were $36.2 million and $36.9 million at December 28, 2013 and September 28, 2013, respectively.

 

Total depreciation and amortization expense relating to all fixed assets was $48.0 million and $43.8 million for the thirteen weeks ended December 28, 2013 and December 29, 2012, respectively.

 

As of December 28, 2013, construction-in-progress includes $33.2 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 thirteen weeks ended December 28, 2013 (in thousands):

 

 

 

Domestic

 

Canada

 

Total

 

Balance at September 28, 2013

 

$

369,353

 

$

418,831

 

$

788,184

 

Foreign currency effect

 

 

(15,837

)

(15,837

)

Balance at December 28, 2013

 

$

369,353

 

$

402,994

 

$

772,347

 

 

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

 

 

 

December 28, 2013

 

September 28, 2013

 

Trade names

 

$

94,044

 

$

97,740

 

 

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Table of Contents

 

Intangible Assets Subject to Amortization

 

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

 

 

 

 

 

December 28, 2013

 

September 28, 2013

 

 

 

Useful Life in 
Years

 

Gross Carrying 
Amount

 

Accumulated 
Amortization

 

Gross Carrying 
Amount

 

Accumulated 
Amortization

 

Acquired technology

 

4-10

 

$

21,598

 

$

(17,539

)

$

21,609

 

$

(17,123

)

Customer and roaster agreements

 

8-11

 

26,702

 

(20,411

)

26,977

 

(19,750

)

Customer relationships

 

2-16

 

402,822

 

(118,843

)

414,967

 

(113,061

)

Trade names

 

9-11

 

36,563

 

(14,064

)

37,200

 

(13,353

)

Non-compete agreements

 

2-5

 

374

 

(369

)

374

 

(364

)

Total

 

 

 

$

488,059

 

$

(171,226

)

$

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 $11.2 million and $11.5 million for the thirteen weeks ended December 28, 2013 and December 29, 2012, 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):

 

Remainder of 2014

 

$

32,278

 

2015

 

41,686

 

2016

 

40,959

 

2017

 

39,564

 

2018

 

39,564

 

2019

 

39,464

 

Thereafter

 

83,318

 

 

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 weeks ended December 28, 2013 and December 29, 2012 are as follows (in thousands):

 

 

 

Thirteen weeks ended

 

 

 

December 28, 
2013

 

December 29, 
2012

 

Balance, beginning of period

 

$

7,804

 

$

20,218

 

Provision related to current period

 

10,230

 

14,221

 

Change in estimate

 

(58

)

(3,230

)

Usage

 

(5,185

)

(6,853

)

Balance, end of period

 

$

12,791

 

$

24,356

 

 

For the thirteen weeks ended December 28, 2013 and December 29, 2012, the Company recorded recoveries of $0.5 million and $0.4 million, respectively.  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.

 

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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 thirteen weeks ended December 28, 2013 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

 

111

 

137

 

Adjustment to redemption value

 

(226

)

(877

)

Cash distributions

 

(186

)

(198

)

Other comprehensive loss

 

(185

)

(421

)

Balance at December 28, 2013

 

$

4,448

 

$

9,686

 

 

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 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.

 

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Table of Contents

 

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 December 28, 2013, the Company has approximately two 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 weeks ended December 28, 2013 and December 29, 2012 was $0.4 million and $0.5 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.

 

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

 

 

 

 

December 28, 2013

 

September 28, 2013

 

Balance Sheet Classification

 

Derivatives designated as cash flow hedges:

 

 

 

 

 

 

 

Interest rate swaps

 

$

(5,431

)

$

(6,004

)

Other current liabilities

 

Coffee futures

 

(886

)

 

Other current assets

 

Coffee futures

 

 

(3,809

)

Other current liabilities

 

Foreign currency forward contracts

 

 

(141

)

Other current liabilities

 

Foreign currency forward contracts

 

135

 

13

 

Other current assets

 

 

 

$

(6,182

)

$

(9,941

)

 

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedges:

 

 

 

 

 

 

 

Cross currency swap

 

$

3,308

 

$

 

Other current assets

 

Cross currency swap

 

 

(1,253

)

Other current liabilities

 

Coffee futures

 

2,476

 

 

Other current assets

 

 

 

$

5,784

 

$

(1,253

)

 

 

 

 

 

 

 

 

 

 

Total

 

$

(398

)

$

(11,194

)

 

 

 

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Table of Contents

 

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 December 28, 2013 and September 28, 2013 is as follows (in thousands):

 

 

 

Gross amounts 

 

Gross amounts 
offset in the 

 

Net amount of 
assets presented 
in the 

 

Gross amounts not offset in the 
Consolidated Balance Sheet

 

 

 

 

 

of recognized 
assets

 

Consolidated 
Balance Sheet

 

Consolidated 
Balance Sheet

 

Financial 
instruments

 

Cash collateral 
received

 

Net amount

 

Derivative assets, as of December 28, 2013

 

$

6,321

 

$

(1,288

)

$

5,033

 

$

 

$

 

$

5,033

 

Derivative assets, as of September 28, 2013

 

13

 

 

13

 

 

 

13

 

 

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

 

 

 

Gross amounts 

 

Gross amounts 
offset in the 

 

Net amount of 
liabilities 
presented in the 

 

Gross amounts not offset in the 
Consolidated Balance Sheet

 

 

 

 

 

of recognized 
liabilities

 

Consolidated 
Balance Sheet

 

Consolidated 
Balance Sheet

 

Financial 
instruments

 

Cash collateral 
pledged

 

Net amount

 

Derivative liabilities, as of December 28, 2013

 

$

6,719

 

$

(1,288

)

$

5,431

 

$

 

$

 

$

5,431

 

Derivative liabilities, as of September 28, 2013

 

11,207

 

 

11,207

 

 

 

11,207

 

 

The following table summarizes the amount of 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

 

 

 

December 28, 2013

 

December 29, 2012

 

Cash Flow Hedges:

 

 

 

 

 

Interest rate swaps

 

$

574

 

$

1,032

 

Coffee futures

 

(1,400

)

(898

)

Foreign currency forward contracts

 

195

 

 

Total

 

$

(631

)

$

134

 

 

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Table of Contents

 

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

 

 

 

Thirteen weeks ended

 

 

 

 

 

December 28,
2013

 

December 29,
2012

 

Location of Losses Reclassified 
from OCI into Income

 

Coffee futures

 

$

(206

)

$

(349

)

Cost of sales

 

Foreign currency forward contracts

 

(44

)

 

Cost of sales

 

Foreign currency forward contracts

 

(25

)

 

Loss on foreign currency, net

 

Total

 

$

(275

)

$

(349

)

 

 

 

The Company expects to reclassify $4.4 million of net losses, net of tax, from OCI to earnings for coffee derivatives within the next twelve months.

 

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

 

Location of net gain in 

 

 

 

December 28, 
2013

 

December 29, 
2012

 

Unaudited Consolidated 
Statements of Operations

 

Net gain on cross currency swap

 

$

4,561

 

$

1,104

 

Gain on financial instruments, net

 

Net gain on coffee futures

 

2,125

 

 

Cost of sales

 

Total

 

$

6,686

 

$

1,104

 

 

 

 

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 identical or 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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Table of Contents

 

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

 

 

 

Fair Value Measurements Using

 

 

 

Level 1

 

Level 2

 

Level 3

 

Derivatives:

 

 

 

 

 

 

 

Interest rate swaps

 

$

 

$

(5,431

)

$

 

Cross currency swap

 

 

3,308

 

 

Coffee futures

 

 

1,590

 

 

Foreign currency forward contracts

 

 

135

 

 

Total

 

$

 

$

(398

)

$

 

 

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 December 28, 2013, 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 $170.3 million and $173.2 million as of December 28, 2013 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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Table of Contents

 

11.        Income Taxes

 

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

 

As of December 28, 2013, the Company had a $17.7 million state capital loss carryforward and a state net operating loss carrryforward of $11.5 million available to be utilized against future taxable income for years through fiscal 2015 and 2029, respectively, subject to annual limitation pertaining to change in ownership rules under the Internal Revenue Code of 1986, as amended.  Based upon earnings history, the Company concluded that it is more likely than not that the net operating loss carryforward will be utilized prior to its expiration, but that the capital loss carryforward will not.  The Company has recorded a valuation allowance against the entire deferred tax asset balance for the capital loss carryforward.

 

The total amount of unrecognized tax benefits as of December 28, 2013 and September 28, 2013 was $23.5 million and $23.3 million, respectively.  The amount of unrecognized tax benefits at December 28, 2013 that would impact the effective tax rate if resolved in favor of the Company is $19.9 million.  As a result of prior acquisitions, the Company is indemnified for $12.6 million of the total reserve balance, and the indemnification is capped at CDN $37.9 million.  If these unrecognized tax benefits are resolved in favor of the Company, the associated indemnification receivable, recorded in other long-term assets, would be reduced accordingly.  The indemnifications have expiration dates through June 2015.

 

As of December 28, 2013 and September 28, 2013, accrued interest and penalties of $2.2 million and $2.0 million, respectively, were included in the Unaudited Consolidated Balance Sheets.  The Company recognizes interest and penalties in income tax expense.  The Company expects to release $6.9 million of unrecognized tax benefits during the remainder of fiscal 2014 due to the expiration of the statute of limitations.

 

In the normal course of business, the Company is subject to tax examinations by taxing authorities both inside and outside of the United States.  The Company is currently being examined by the Internal Revenue Service for its fiscal year ended September 25, 2010.  With some exceptions, the Company is generally no longer subject to examinations with respect to returns filed for fiscal years prior to 2006.

 

12.        Stockholders’ Equity

 

Stock Repurchase Program

 

On July 30, 2012, the Board of Directors authorized a program for the Company to repurchase up to $500.0 million of the Company’s common shares over two years (the “2012 Share Repurchase Program”), at such times and prices as determined by the Company’s management.  On November 19, 2013, the Company’s Board of Directors approved and authorized the repurchase, on or prior to December 1, 2015, of up to an aggregate amount of $1.0 billion of the Company’s outstanding common shares (the “2013 Share Repurchase Program”), at such times and prices as determined by the Company’s management.  The 2013 Share Repurchase Program will become effective upon completion of the 2012 Share Repurchase Program.

 

As of December 28, 2013, an aggregate $1,112.8 million remained available for share repurchases under the 2012 and 2013 Share Repurchase Programs.

 

 

 

Thirteen weeks 
ended

 

 

 

 

 

December 28, 2013

 

Fiscal 2013

 

Number of shares acquired

 

1,725,483

 

5,642,793

 

Average price per share of acquired shares

 

$

70.97

 

$

33.37

 

Total cost of acquired shares (in thousands)

 

$

122,464

 

$

188,278

 

 

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Accumulated Other Comprehensive Income (Loss)

 

The following table provides the changes in the components of accumulated other comprehensive income (loss), net of tax (in thousands) for the thirteen weeks ended December 28, 2013:

 

 

 

Cash Flow Hedges

 

Translation

 

Accumulated Other 
Comprehensive Income 
(Loss)

 

Balance at September 28, 2013

 

$

(7,150

)

$

(12,035

)

$

 (19,185

)

Other comprehensive loss, before reclassifications

 

(351

)

(24,890

)

(25,241

)

Amounts reclassified from accumulated other comprehensive income (loss)

 

173

 

 

173

 

Net current period other comprehensive loss

 

(178

)

(24,890

)

(25,068

)

Balance at December 28, 2013

 

$

(7,328

)

$

(36,925

)

$

(44,253

)

 

The unfavorable translation adjustment change during the thirteen weeks ended December 28, 2013 was primarily due to the weakening of the Canadian dollar against the U.S. dollar.  See also Note 9, Derivative Financial Instruments .

 

Dividends

 

During the first quarter of fiscal 2014, the Company’s Board of Directors declared a quarterly cash dividend to shareholders of $0.25 per share to be paid on February 14, 2014 to shareholders of record as of the close of business on January 17, 2014.

 

13.        Compensation Plans

 

Stock Option Plans

 

The grant-date fair value of employee stock options and similar instruments is estimated using the Black-Scholes option-pricing model with the following assumptions for grants issued during the thirteen weeks ended December 28, 2013 and December 29, 2012:

 

 

 

Thirteen weeks ended

 

 

 

December 28,
2013

 

December 29,
2012

 

Average expected life

 

5.5 years

 

6.0 years

 

Average volatility

 

75

%

81

%

Dividend yield

 

1.33

%

%

Risk-free interest rate

 

1.69

%

0.84

%

Weighted average fair value

 

$

40.98

 

$

22.66

 

 

Restricted Stock Units and Other Awards

 

The Company awards restricted stock units (“RSUs”), restricted stock awards (“RSAs”) and performance stock units (“PSUs”) to eligible employees (“Grantee”) which entitle a Grantee to receive shares of the Company’s common stock.  RSUs and PSUs are awards denominated in units that are settled in shares of the Company’s common stock upon vesting.  RSAs are awards of common stock that are restricted until the shares vest.  In general, RSUs and RSAs vest based on a Grantee’s continuing employment.  The vesting of PSUs is conditioned on the achievement of both a Grantee’s service and the Company’s performance requirements.  The fair value of RSUs, RSAs and PSUs is based on the closing price of the Company’s common stock on the grant date.  Compensation expense for RSUs and RSAs is recognized ratably over a Grantee’s service period.  Compensation expense for PSUs is also recognized over a Grantee’s service period, but only if and when the Company concludes that it is probable (more than likely) the performance condition(s) will be achieved.  The assessment of the probability of achievement is performed each period based on the relevant facts and circumstances at that time, and if the estimated grant-date fair value changes as a result of that assessment, the cumulative effect of the change on current and prior periods is recognized in the period of change.  All awards are reserved for issuance under the Company’s 2006 Incentive Plan and vest over periods determined by the Board of Directors, generally in the range of three to four years for RSUs, RSAs, and three years for PSUs.

 

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In addition, the Company has awarded deferred cash awards (“DCAs”) to Grantees which entitle a Grantee to receive cash paid over time upon vesting.  The vesting of DCAs is over a four year period conditioned on a Grantee’s continued employment.

 

Employee Stock Purchase Plan

 

The grant-date fair value of employees’ purchase rights under the Company’s Employee Stock Purchase Plan is estimated using the Black-Scholes option-pricing model with the following assumptions for the purchase rights granted during the thirteen weeks ended December 28, 2013 and December 29, 2012:

 

 

 

Thirteen weeks ended

 

 

 

December 28,
2013

 

December 29,
2012

 

Average expected life

 

6 months

 

6 months

 

Average volatility

 

55

%

114

%

Dividend yield

 

1.34

%

%

Risk-free interest rate

 

0.04

%

0.14

%

Weighted average fair value

 

$

22.57

 

$

10.82

 

 

Income before income taxes in the Unaudited Consolidated Statements of Operations includes compensation expense related to the plans described above of $7.1 million and $6.1 million for the thirteen weeks ended December 28, 2013 and December 29, 2012, respectively.

 

Deferred Compensation Plan

 

The Company also maintains a Deferred Compensation Plan (“Plan”) which allows participants to defer compensation until a future date.  Only directors and certain highly compensated employees of the Company selected by the Company’s Board of Directors are eligible to participate in the Plan.  Compensation expense recorded under the Plan was $0.01 million and $0.1 million for the thirteen weeks ended December 28, 2013 and December 29, 2012, respectively.

 

14.        Legal Proceedings

 

On October 1, 2010, Keurig, Incorporated, formerly a wholly-owned subsidiary of the Company which was merged with and into the Company on December 31, 2013 (“Keurig”), filed suit against Sturm Foods, Inc.  (“Sturm”) in the United States District Court for the District of Delaware (Civil Action No. 1:10-CV-00841-SLR) for patent and trademark infringement, false advertising, and other claims, related to Sturm’s sale of “Grove Square” beverage cartridges that claim to be compatible with Keurig brewers.  Separately, on February 19, 2013, Keurig and Sturm entered into a settlement agreement with respect to the trademark infringement, false advertising, and other claims at issue in the suit, all of which have now been dismissed.  The settlement agreement did not materially impact the Company’s consolidated financial results of operations.  On October 17, 2013, the United States Federal Circuit Court of Appeals upheld the District Court’s summary judgment decision on the Company’s patent claims.  The Company is not seeking further review of that decision.

 

On November 2, 2011, Keurig filed suit against JBR, INC., d/b/a Rogers Family Company (“Rogers”) in the United States District Court for the District of Massachusetts (Civil Action No. 1:11-cv-11941-FDS) for patent infringement related to Rogers’ sale of “OneCup” beverage cartridges for use with Keurig brewers.  The suit alleges that the “OneCup” cartridges infringe certain Keurig patents (U.S. Patent Nos. D502,362, 7,165,488 and 7,347,138).  Keurig sought an injunction prohibiting Rogers from selling these cartridges, as well as money damages.  In late 2012, Rogers moved for summary judgment of no infringement as to all three asserted patents.  On May 24, 2013, the District Court granted Rogers’ summary judgment motions.  Keurig has since appealed the Court’s ruling to the Federal Circuit, and that appeal is currently pending.

 

On May 9, 2011, an organization named Council for Education and Research on Toxics (“CERT”), purporting to act in the public interest, filed suit in Los Angeles Superior Court ( Council for Education and Research on Toxics v. Brad Barry LLC, et al. , Case No. BC461182.) against several companies, including the Company, that roast, package, or sell coffee in California.  The Brad Barry complaint alleges that coffee contains the chemical acrylamide and that the Company and the other defendants are required to provide warnings under section 25249.6 of the California Safe Drinking Water and Toxics Enforcement Act, better known as Proposition 65.  The Brad Barry action has been consolidated for all purposes with another Proposition 65 case filed by CERT on April 13, 2010 over allegations of acrylamide in “ready to drink” coffee sold in restaurants, convenience stores, and do-nut shops.  ( Council for Education and Research on Toxics v. Starbucks Corp., et al. , Case No. BC 415759).

 

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The Company was not named in the Starbucks complaint.  The Company has joined a joint defense group (“JDG”) organized to address CERT’s allegations, and the Company intends to vigorously defend against these allegations.  The Court has ordered the case phased for discovery and trial.  The first phase of the case, which has been set for trial on September 8, 2014, is limited to three affirmative defenses shared by all defendants in both cases, with other affirmative defenses, plaintiff’s prima facie case, and remedies deferred for subsequent phases.  Discovery on the first phase of the case is underway.  Because this lawsuit is only in a preliminary stage, the Company is unable to predict its outcome, the potential loss or range of loss, if any, associated with its resolution or any potential effect it may have on the Company or its operations.

 

On January 24, 2012, Teashot.LLC (“Teashot”) filed suit against the Company, Keurig and Starbucks Corp. (“Starbucks”) in the United States District Court for the District of Colorado (Civil Action No. 12-cv-00189-WJM-KMT) for patent infringement related to the making, using, importing, selling and/or offering for sale of K-Cup packs containing tea.  The suit alleges that the Company, Keurig and Starbucks infringe a Teashot patent (U.S. Patent No. 5,895,672).  Teashot seeks an injunction prohibiting the Company, Keurig and Starbucks from continued infringement, as well as money damages.  Pursuant to the Company’s Manufacturing, Sales and Distribution Agreement with Starbucks, the Company is defending and indemnifying Starbucks in connection with the suit.  On March 13, 2012, the Company and Keurig, for themselves and Starbucks, filed an answer with the court, generally denying all of Teashot’s allegations.  The Company and Keurig, for themselves and Starbucks, are vigorously defending this lawsuit.  On May 24, 2013, the Company and Keurig, for themselves and Starbucks, filed a motion for summary judgment of non-infringement.  On July 19, 2013, Teashot filed a motion for partial summary judgment on certain other, unrelated issues.  No hearing on the summary judgment motions has been scheduled.  At this time, the Company is unable to predict the outcome of this lawsuit, the potential loss or range of loss, if any, associated with the resolution of this lawsuit or any potential effect it may have on the Company or its operations.

 

Securities and Exchange Commission (“SEC”) Inquiry

 

As first disclosed on September 28, 2010, the staff of the SEC’s Division of Enforcement continues to conduct an inquiry into matters at the Company.  The Company is cooperating fully with the SEC staff’s inquiry.

 

Stockholder Litigation

 

Two putative securities fraud class actions are presently pending against the Company and certain of its officers and directors, along with two putative stockholder derivative actions.  The first pending putative securities fraud class action was filed on November 29, 2011, and the second putative securities fraud class action was filed on May 7, 2012.  The first putative stockholder derivative action is a consolidated action pending in the United States District Court for the District of Vermont that consists of five separate putative stockholder derivative complaints, the first two were filed after the Company’s disclosure of the SEC inquiry on September 28, 2010, while the others were filed on February 10, 2012, March 2, 2012, and July 23, 2012, respectively.  The second putative stockholder derivative action is pending in the Superior Court of the State of Vermont for Washington County and was commenced following the Company’s disclosure of the SEC inquiry on September 28, 2010.

 

The first putative securities fraud class action, captioned Louisiana Municipal Police Employees’ Retirement System (“LAMPERS”) v. Green Mountain Coffee Roasters, Inc., et al., Civ. No. 2:11-cv-00289, was filed in the United States District Court for the District of Vermont before the Honorable William K. Sessions, III.  Plaintiffs’ amended complaint alleged violations of the federal securities laws in connection with the Company’s disclosures relating to its revenues and its inventory accounting practices.  The amended complaint sought class certification, compensatory damages, attorneys’ fees, costs, and such other relief as the court should deem just and proper.  Plaintiffs sought to represent all purchasers of the Company’s securities between February 2, 2011 and November 9, 2011.  The initial complaint filed in the action on November 29, 2011 included counts for alleged violations of (1) Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 (the “Securities Act”) against the Company, certain of its officers and directors, and the Company’s underwriters in connection with a May 2011 secondary common stock offering; and (2) Section 10(b) of the Exchange Act and Rule 10b-5 against the Company and the officer defendants, and for violation of Section 20(a) of the Exchange Act against the officer defendants.  Pursuant to the Private Securities Litigation Reform Act of 1995, 15 U.S.C. § 78u-4(a)(3), plaintiffs had until January 30, 2012 to move the court to serve as lead plaintiff of the putative class.  Competing applications were filed and the Court appointed Louisiana Municipal Police Employees’ Retirement System, Sjunde AP-Fonden, Board of Trustees of the City of Fort Lauderdale General Employees’ Retirement System, Employees’ Retirement System of the Government of the Virgin Islands, and Public Employees’ Retirement System of Mississippi as lead plaintiffs’ counsel on April 27, 2012.  Pursuant to a schedule approved by the court, plaintiffs filed their amended complaint on October 22, 2012, and plaintiffs filed a corrected amended complaint on November 5, 2012.  Plaintiffs’ amended complaint did not allege any claims under the Securities Act against the Company, its officers and directors, or the Company’s underwriters in connection with the May 2011 secondary common stock offering.  Defendants moved to dismiss the amended complaint on March 1, 2013 and on December 20, 2013, the court issued an order dismissing the amended complaint with prejudice.  On January 21, 2014, plaintiffs filed a notice of intent to appeal the court’s December 20, 2013 order to the United States Court of Appeals for the Second Circuit.

 

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The underwriters previously named as defendants notified the Company of their intent to seek indemnification from the Company pursuant to their underwriting agreement dated May 5, 2011 in regard to the claims asserted in this action.

 

The second putative securities fraud class action, captioned Fifield v. Green Mountain Coffee Roasters, Inc., Civ. No. 2:12-cv-00091, was also filed in the United States District Court for the District of Vermont before the Honorable William K. Sessions, III.  Plaintiffs’ amended complaint alleged violations of the federal securities laws in connection with the Company’s disclosures relating to its forward guidance.  The amended complaint included counts for alleged violations of Section 10(b) of the Exchange Act and Rule 10b-5 against all defendants, and for alleged violation of Section 20(a) of the Exchange Act against the officer defendants.  The amended complaint sought class certification, compensatory damages, equitable and/or injunctive relief, attorneys’ fees, costs, and such other relief as the court should deem just and proper.  Plaintiffs sought to represent all purchasers of the Company’s securities between February 2, 2012 and May 2, 2012.  Pursuant to the Private Securities Litigation Reform Act of 1995, 15 U.S.C. § 78u-4(a)(3), plaintiffs had until July 6, 2012 to move the court to serve as lead plaintiff of the putative class.  On July 31, 2012, the court appointed Kambiz Golesorkhi as lead plaintiff and approved his selection of Kahn Swick & Foti LLC as lead counsel.  On August 14, 2012, the court granted the parties’ stipulated motion for filing of an amended complaint and to set a briefing schedule for defendants’ motions to dismiss.  Pursuant to a schedule approved by the court, plaintiffs filed their amended complaint on October 23, 2012, adding William C. Daley as an additional lead plaintiff.  Defendants moved to dismiss the amended complaint on January 17, 2013 and the briefing of their motions was completed on May 17, 2013.  On September 26, 2013, the court issued an order granting defendants’ motions and dismissing the amended complaint without prejudice and allowing plaintiffs a 30-day period within which to amend their complaint.  On October 18, 2013, plaintiffs filed a notice of intent to appeal the court’s September 26, 2013 order to the United States Court of Appeals for the Second Circuit.  On November 1, 2013, following the expiration of the 30-day period to amend the complaint, defendants filed a motion for final judgment in District Court.  Briefing on the appeal was completed on January 28, 2014.

 

The first putative stockholder derivative action, a consolidated action captioned In re Green Mountain Coffee Roasters, Inc.  Derivative Litigation, Civ. No. 2:10-cv-00233, premised on the same allegations asserted in now-dismissed Horowitz v. Green Mountain Coffee Roasters, Inc., Civ. No. 2:10-cv-00227 securities class action complaint and the other pending putative securities class action complaints described above, is pending in the United States District Court for the District of Vermont before the Honorable William K. Sessions, III.  On November 29, 2010, the federal court entered an order consolidating two actions and appointing the firms of Robbins Umeda LLP and Shuman Law Firm as co-lead plaintiffs’ counsel.  On February 23, 2011, the federal court approved a stipulation filed by the parties providing for a temporary stay of that action until the court rules on defendants’ motions to dismiss the consolidated complaint in the Horowitz putative securities fraud class action.  On March 7, 2012, the federal court approved a further joint stipulation continuing the temporary stay until the court either denies a motion to dismiss the Horowitz putative securities fraud class action or the Horowitz putative securities fraud class action is dismissed with prejudice.  On April 27, 2012, the federal court entered an order consolidating the stockholder derivative action captioned Himmel v. Robert P. Stiller, et al., with two additional putative derivative actions, Musa Family Revocable Trust v. Robert P. Stiller, et al., Civ. No. 2:12-cv-00029, and Laborers Local 235 Benefit Funds v. Robert P.  Stiller, et al., Civ. No. 2:12-cv- 00042.  On November 14, 2012, the federal court entered an order consolidating an additional stockholder derivative action, captioned Henry Cargo v. Robert P. Stiller, et al., Civ. No. 2:12-cv-00161, and granting plaintiffs leave to lift the stay for the limited purpose of filing a consolidated complaint.  The consolidated complaint is asserted nominally on behalf of the Company against certain of its officers and directors.  The consolidated complaint asserts claims for breach of fiduciary duty, waste of corporate assets, unjust enrichment, contribution, and indemnification and seeks compensatory damages, injunctive relief, restitution, disgorgement, attorney’s fees, costs, and such other relief as the court should deem just and proper.  On May 14, 2013, the court approved a joint stipulation filed by the parties providing for a temporary stay of the proceedings until the conclusion of the appeal in the Horowitz putative securities fraud class action.  On August 1, 2013, the parties filed a further joint stipulation continuing the temporary stay until the court either denies a motion to dismiss the LAMPERS putative securities fraud class action or the LAMPERS putative securities fraud class action is dismissed with prejudice, which the court approved on August 2, 2013.  As a result of the ruling in the LAMPERS putative securities fraud class action, the temporary stay has been lifted and the parties are to propose a scheduling order for the action.

 

The second putative stockholder derivative action, M.  Elizabeth Dickinson v. Robert P. Stiller, et al., Civ. No. 818-11-10, is pending in the Superior Court of the State of Vermont for Washington County.  On February 28, 2011, the court approved a stipulation filed by the parties similarly providing for a temporary stay of that action until the federal court rules on defendants’ motions to dismiss the consolidated complaint in the Horowitz putative securities fraud class action.  As a result of the federal court’s ruling in the Horowitz putative securities fraud class action, the temporary stay was lifted.  On June 25, 2013, plaintiff filed an amended complaint in the action, which is asserted nominally on behalf of the Company against certain current and former directors and officers.  The amended complaint is premised on the same allegations alleged in the Horowitz, LAMPERS, and Fifield putative securities fraud class actions.  The amended complaint asserts claims for breach of fiduciary duty, unjust enrichment, waste of corporate assets, and alleged insider selling by certain of the named defendants.

 

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The amended complaint seeks compensatory damages, injunctive relief, restitution, disgorgement, attorneys’ fees, costs, and such other relief as the court should deem just and proper.  On August 7, 2013, the parties filed a further joint stipulation continuing the temporary stay until the court either denies a motion to dismiss the LAMPERS putative securities fraud class action or the LAMPERS putative securities fraud class action is dismissed with prejudice, which the court approved on August 21, 2013.  As a result of the ruling in the LAMPERS putative securities fraud class action, the temporary stay has been lifted and the parties are to propose a scheduling order for the action.

 

The Company and the other defendants intend to vigorously defend all the pending lawsuits.  Additional lawsuits may be filed and, at this time, the Company is unable to predict the outcome of these lawsuits, the possible loss or range of loss, if any, associated with the resolution of these lawsuits or any potential effect they may have on the Company or its operations.

 

Shareholder Demand

 

On January 27, 2014, the Company received a letter from a plaintiffs’ class action law firm, on behalf of a purported shareholder of the Company’s common stock, concerning the Schedule 14A the Company filed with the Securities and Exchange Commission on January 21, 2014 (the “Proxy Statement”).  The letter claims that the circumstances surrounding the Board’s approval of Proposal No. 4 were not adequately disclosed in the Proxy Statement.  Proposal No. 4 seeks shareholder approval of the 2014 Omnibus Incentive Plan (the “2014 Omnibus Plan”), which, as disclosed in the Proxy Statement, if approved will replace the Company’s Amended and Restated Green Mountain Coffee Roasters, Inc. 2006 Incentive Plan (the “2006 Plan”) and the Company’s Senior Executive Officer Short Term Incentive Plan.

 

The Company believes that the allegations by the law firm are frivolous and lack merit, including, among other reasons, because, as explained further below, they ignore the extensive disclosure provided in the Proxy Statement.  Capitalized terms used herein and not otherwise defined have the meanings given to them in the Proxy Statement.

 

As set forth in the Proxy Statement, the 2014 Omnibus Plan is an important part of the Company’s pay-for-performance compensation strategy, pursuant to which the Compensation and Organizational Development Committee (the “Compensation Committee”) and management periodically evaluate ways to attract, retain and motivate highly qualified individuals and to ensure compensation is tied to performance and aligns the interests of employees and Directors with those of stockholders.  The Compensation Discussion and Analysis included in the Proxy Statement discusses the Company’s executive compensation philosophy and programs and the Company’s historical equity grant practices; the criteria upon which the Compensation Committee relies in determining the type and amount of compensation opportunities provided to the Company’s executive officers; the contribution of the analysis of the independent consultant retained by the Compensation Committee in fiscal 2013 to the determinations made by the Compensation Committee; a description of the Company’s equity awards granted in fiscal 2013; and a description of the equity awards made with respect to 2014 and granted in December 2013.  In addition, the compensation tables included after the Compensation Discussion and Analysis disclose the grant date value of, and number of shares subject to, equity award grants made to the Named Executive Officers in fiscal 2013.

 

The Proxy Statement sets forth the number of awards with respect to fiscal 2014 compensation, which were granted to each of the Company’s Named Executive Officers, to the Company’s executive officers in the aggregate, and to the Company’s non-executive officer employee group in the aggregate, in each case on December 6, 2013 under the 2014 Omnibus Plan, subject to shareholder approval.  Because the grant of awards pursuant to the 2014 Omnibus Plan will be within the discretion of the Compensation Committee, it is not possible to determine the awards that will be granted to executive officers and other service providers under the 2014 Omnibus Plan in the future.

 

As set forth in the Proxy Statement, the maximum number of shares of common stock that may be issued pursuant to awards granted under the 2014 Omnibus Plan is 8,000,000, which includes 4,185,606 shares of common stock that were available for grant under the 2006 Plan as of December 6, 2013, the date of the Board of Directors’ approval of the 2014 Omnibus Plan, and up to 1,661,205 shares of common stock, if any, that may become available for grant under the 2006 Plan after December 6, 2013 as a result of forfeiture, expiration or cancellation of awards under the 2006 Plan.  If approved, the 8,000,000 maximum number of shares that may be issued pursuant to awards under the 2014 Omnibus Plan represents an increase of between 2,153,189 (assuming all unvested grants as of December 6, 2013 are forfeited, expired, or canceled) to 3,814,394 (assuming no outstanding awards as of December 6, 2013 are forfeited, expired, or canceled) additional shares.  As set forth in the Proxy Statement, as of January 6, 2014, there were 148,831,415 shares of Common Stock issued and outstanding.

 

The footnotes to the Company’s financial statements as set forth in the 10-K for each of fiscal 2013, fiscal 2012, and fiscal 2011 set forth detailed information regarding the equity awards granted each fiscal year as well as the total number of outstanding shares with respect to each type of award.

 

The total number of shares outstanding as of the dates reported at the outset of the Company’s Form 10-K filings for fiscal 2011, fiscal 2012, and fiscal 2013 ranged between 148,451,513 and 154,624,238.

 

As disclosed in the Company’s Form 8-K filed on March 16, 2010, on March 11, 2010 the Company’s shareholders approved the 2006 Plan which originally authorized 4,400,000 shares of common stock.  As a result of the Company’s 3:1 stock split declared on April 28, 2010, the number of shares authorized under the 2006 Plan was increased to 13,200,000 shares of common stock.  The Proxy Statement and the Company’s Form 10-K for the fiscal year ended September 28, 2013 identify the number of shares available for grant for future equity-based compensation awards under the 2006 Plan as of September 28, 2013, and the Company’s Form 10-K for the fiscal year ended September 29, 2012 identifies the number of shares available for grant for future equity-based compensation awards under the 2006 Plan as of September 29, 2012.

 

The Company cannot assure shareholders that the plaintiff will not sue, regardless of any actions the Company may take.

 

15.        Related Party Transactions

 

The Company, from time to time, has used travel services provided by Heritage Flight, a charter air services company owned by Robert P. Stiller.  Mr. Stiller previously served on the Company’s Board of Directors.  The Company did not incur any expenses for Heritage Flight travel services for the thirteen weeks ended December 28, 2013, and incurred $0.2 million during the thirteen weeks ended December 29, 2012.

 

16.        Earnings Per Share

 

The following table illustrates the reconciliation of the numerator and denominator of basic and diluted earnings per share computations (dollars in thousands, except per share data):

 

 

 

Thirteen weeks ended

 

 

 

December 28,
2013

 

December 29,
2012

 

Numerator for basic and diluted earnings per share:

 

 

 

 

 

Net income attributable to GMCR

 

$

138,227

 

$

107,583

 

Denominator:

 

 

 

 

 

Basic weighted-average shares outstanding

 

149,162,600

 

149,317,597

 

Effect of dilutive securities

 

2,419,297

 

3,391,210

 

Diluted weighted-average shares outstanding

 

151,581,897

 

152,708,807

 

 

 

 

 

 

 

Basic net income per common share

 

$

0.93

 

$

0.72

 

Diluted net income per common share

 

$

0.91

 

$

0.70

 

 

For the thirteen weeks ended December 28, 2013 and December 29, 2012, shares related to equity-based compensation of 483,400 and 1,416,402, respectively, were excluded from the calculation of diluted earnings per share because they were antidilutive.

 

17.  Subsequent Events

 

On February 5, 2014, the Company entered into a 10-year strategic collaboration agreement with The Coca-Cola Company (“Coca-Cola”), a Delaware corporation, to jointly develop and market Coca-Cola products for use in the Company’s cold beverage system.  Concurrently, on February 5, 2014 the Company entered into a Common Stock Purchase Agreement (the “SPA”) whereby a wholly-owned subsidiary of The Coca-Cola Company will purchase a 10% minority equity position in the Company for an aggregate purchase price of approximately $1.25 billion.  Under the terms of the SPA, Coca-Cola, through its wholly-owned subsidiary, will acquire 16,684,139 common shares at a purchase price per share of $74.98, which represents the trailing 50-trading-day volume weighted average price as of February 5, 2014.  The Company intends to use the proceeds to continue to execute its share repurchase programs to reduce dilution from the transaction.  In addition, GMCR intends to use a portion of the $1.25 billion of proceeds to fund anticipated capital expenditures for product development over the next several years.  The SPA is expected to close in March 2014, subject to the satisfaction of closing conditions including receipt of required regulatory approvals.

 

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis is intended to help you understand the results of operations and financial condition of Green Mountain Coffee Roasters, Inc. (together with its subsidiaries, the “Company”, “GMCR”, “we”, “our”, or “us”).  You should read the following discussion and analysis in conjunction with our unaudited consolidated financial statements and related notes included elsewhere in this report.

 

Overview

 

We are a leader in the specialty coffee and coffeemaker businesses in the United States and Canada.  We sell Keurig ®  Single Cup brewers and roast high-quality Arabica bean coffees including single-origin, Fair Trade Certified , certified organic, flavored, limited edition and proprietary blends offered in K-Cup ® , Vue ® , and Rivo ®  packs (“packs”) for use with our Keurig ®  Single Cup brewers.  We also offer traditional whole bean and ground coffee in other package types including bags, fractional packages and cans.  In addition, we produce and sell other specialty beverages in packs including hot apple cider, hot and iced teas, iced coffees, iced fruit brews, hot cocoa and other dairy-based beverages.  Unless the context indicates otherwise, the terms “GMCR”, the “Company”, “we”, “our”, or “us” refer to Green Mountain Coffee Roasters, Inc., together with its subsidiaries.

 

The beverage brands we offer include:

 

Arbuckle ®

 

Folgers Gourmet Selections ®

 

Seattle’s Best Coffee ®

 

 

 

 

 

Barista Prima Coffeehouse ®

 

Gloria Jean’s ®

 

Selection TM

 

 

 

 

 

Bigelow ®

 

Good Earth ®

 

Snapple ®

 

 

 

 

 

Brûlerie Mont-Royal ®

 

Green Mountain Coffee ®

 

Starbucks ®

 

 

 

 

 

Brûlerie St. Denis ®

 

Green Mountain Naturals ®

 

Swiss Miss ®

 

 

 

 

 

Café Adagio Coffee ®

 

Kahlua ®

 

Tazo ®

 

 

 

 

 

Café Escapes ®

 

Kirkland Signature

 

Tetley®

 

 

 

 

 

Caribou Coffee ®

 

Lavazza ®

 

The Original Donut Shop

 

 

 

 

 

Celestial Seasonings ®

 

Lipton ®

 

Timothy’s ®

 

 

 

 

 

Cinnabon ®

 

Market Basket ®

 

TK

 

 

 

 

 

Coffee People ®

 

McQuarry

 

Tully’s ®

 

 

 

 

 

Diedrich Coffee ®

 

Millstone ®

 

Twinings of London ®

 

 

 

 

 

Distinction ®

 

Newman’s Own ®  Organics

 

Van Houtte ®

 

 

 

 

 

Donut House Collection ®

 

Orient Express ®

 

Vitamin Burst ®

 

 

 

 

 

Dunkin’ Donuts

 

Promenade

 

Wolfgang Puck ®

 

 

 

 

 

Eight O’Clock ®

 

Red Carpet

 

 

 

 

 

 

 

Emeril’s ®

 

revv ®

 

 

 

The Bigelow ® , Caribou Coffee ® , Celestial Seasonings ® , Cinnabon ® , Dunkin’ Donuts , Eight O’Clock ® , Emeril’s ® , Folgers Gourmet Selections ® , Gloria Jean’s ® , Good Earth ® , Kahlua ® , Kirkland Signature , Lavazza ® , Lipton ® , Market Basket ® , Millstone ® , Newman’s Own ®  Organics, Seattle’s Best Coffee ® , Selection TM , Snapple ® , Starbucks ® , Swiss Miss ® , Tazo ® , Tetley ® , Twinings of London ® , and Wolfgang Puck ®  brands are available through relationships we have with their respective brand owners.  Each of these brands is property of their respective owners and is used with permission.

 

Over the last several years the primary growth in the coffee industry has come from the specialty coffee category, including demand for single serve coffee which can now be enjoyed in a wide variety of places, including home, office, professional, restaurants, and hospitality locations.  This growth has been driven by the emergence of specialty coffee shops throughout the U.S. and Canada, the general level of consumer knowledge of, and appreciation for, coffee quality and variety, and the wider availability of high-quality coffee.

 

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The Company has been benefiting from this overall industry trend in addition to what we believe to be our carefully developed and distinctive advantages over our competitors.

 

Our growth strategy involves developing and managing marketing programs to drive Keurig ®  Single Cup brewer adoption in order to generate ongoing demand for packs in American and Canadian households, foodservice and office location and, in the longer term, globally.  As part of this strategy, we work to sell our at-home (“AH”) brewers at attractive price points which are approximately at cost, or sometimes at a loss when factoring in the incremental costs related to sales, in order to drive the sales of profitable packs.  In addition, we have license agreements with Breville PTY Limited (producer of Breville ®  brand coffeemakers), Jarden Consumer Solutions (producer of Mr. Coffee ®  brand coffeemakers), and Conair Corporation (producer of Cuisinart ®  brand coffeemakers), under which each produce, market and sell coffeemakers co-branded with Keurig ® .

 

In recent years, our growth has been driven predominantly by the growth and adoption of Keurig ®  Single Cup Brewing systems which includes both the brewer and related packs.  In the first fiscal quarter of 2014, approximately 94% of our consolidated net sales were attributed to the combination of packs and Keurig ®  Single Cup brewers and related accessories.

 

We believe the primary consumer benefits delivered by our Keurig ®  Single Cup Brewing system are as follows:

 

1                Quality—expectations of the quality of coffee consumers drink has increased over the last several years and, we believe, with the Keurig ®  system, consumers can be certain they will get a high-quality, consistently produced beverage every time.

 

2                Convenience—the Keurig ®  system prepares beverages generally in less than a minute at the touch of a button with no mess, no fuss.

 

3                Choice—with many single serve beverage brands across multiple beverage categories, GMCR offers more than 290 individual varieties, allowing consumers to enjoy and explore a wide range of beverages.  In addition to a variety of brands of coffee and tea, we also produce and sell iced teas, iced coffees, hot and iced fruit brews, hot cocoa and other dairy-based beverages, in packs.

 

We see these benefits as being our competitive advantage and believe it’s the combination of these attributes that make the Keurig ®  Single Cup Brewing system appealing to consumers.

 

We are focused on building our brands and profitably growing our business.  We believe we can continue to grow sales by increasing consumer awareness in the U.S. and Canada, expanding into new geographic regions, expanding consumer choice of coffee, tea and other beverages in our existing brewing systems or through the introduction of new brewing platforms,  expanding sales in adjacent beverage industry segments and/or selectively pursuing other synergistic opportunities.

 

The key elements of our business strategy are as follows:

 

·                   Growing the current Keurig ®  Hot system in  the U.S. and Canada;

·                   Expanding our brand offerings, both owned and partner brands;

·                   Expanding in current channels;

·                   Launching new brewer technologies and innovation;

·                   Beginning international expansion.

 

Growing the current Keurig ®  Hot system in the United States and Canada.  While we are positioned as a leader in the single serve hot beverage marketplace, we estimate our current Keurig ® Hot system is only in approximately 13% of U.S. households.  In order to increase household penetration, we are executing a segmentation strategy to effectively showcase our extensive variety of beverage options.  We are also implementing measures to improve the shopping experience at retail to further distinguish the Keurig ®  brand and enhance brand recognition.  Additionally, we are launching targeted marketing campaigns to increase regional household penetration in certain geographic areas through increased awareness, trial and conversion.

 

Expanding our brand offering.  We have continued to expand consumer choice in the Keurig ®  Single Cup Brewing system by entering into or extending a number of business relationships which enable us to offer other strong national and regional coffee and tea brands, and store brands such as Dunkin’ Donuts TM , Seattle’s Best Coffee ® , Starbucks ® , The Coffee Bean & Tea Leaf ® , Cinnabon ® , Tazo ® , Eight O’Clock ® , Tetley ® , Good Earth ® , Snapple ® , Kirkland Signature TM  and METRO’s Irresistibles K-Cup ®  packs for use with Keurig ®  Single Cup brewers.  We also continue to examine opportunities for business relationships with other strong national/regional brands including the potential for adding premium store-brand or co-branded packs to create additional single serve products that will help augment consumer demand for the Keurig ®  Single Cup Brewing systems.

 

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Furthermore, we are expanding the use of our Keurig ®  Single Cup Brewing system beyond beverages through innovative partnerships, the first of which is with the Campbell Soup Company to produce Campbell’s Fresh-Brewed Soup K-Cup ®  packs which we expect to be available in fiscal 2014.  We believe these new product offerings fuel excitement for current Keurig ®  Single Cup brewer owners and users; raise system awareness; attract new consumers to the system; and promote expanded use of the system.  These relationships are established with careful consideration of potential economics.  We expect to continue to enter into these relationships in our efforts to expand choice and diversify our portfolio of brands with the expectation that they will lead to increased Keurig ®  Single Cup Brewing system awareness and household adoption, in part through the participating brand’s advertising and merchandising activities.  In addition to entering into business relationships with brands that are new to the Keurig ®  Single Cup Brewing system, we expect to be able to convert a number of unlicensed brands to the Keurig ®  system on a licensed basis.

 

Expanding in current channels .  We have identified and are targeting specific opportunities within our existing channels, specifically the AFH channel, including food service, workplace, higher education and hospitality locations.  These are areas where Keurig ®  has substantial room to grow, considering we are currently in less than one percent of food service outlets.

 

Launching new brewer technologies and innovation .  We are also focused on continued innovation in both hot and cold single serve brewing systems.  Some of our recent initiatives and planned product introductions include:

·                   An expansion of the Keurig ®  Hot system with the fiscal 2013 launch of the Keurig ®  Rivo ®  Cappuccino and Latte System and Rivo ®  pack espresso blend varieties, in partnership with Luigi Lavazza S.p.A. (“Lavazza”);

·                   An expansion of the Keurig ®  Hot system with introduction of a new commercial grade Keurig ®  Bolt  platform which, following in-office testing, will be available throughout the U.S. and Canada beginning in fiscal 2014;

·                   An introduction of the next generation beverage platform of the Keurig ® Hot beverage system, which will combine the qualities and technologies of our existing K-Cup ® and Vue ® platforms to offer a wider array of beverages and available sizes, with an estimated launch in late fiscal 2014; and

·                   An estimated launch in fiscal 2015 of the Keurig ® Cold system, which will deliver freshly prepared carbonated, sparkling and still beverages.

 

Beginning international expansion.  Beginning in fiscal 2014 and continuing into fiscal 2015, we are planning to launch our Keurig ®  Hot system global platform in targeted markets with the introduction of a specifically designed Keurig ®  Single Cup brewer.

 

Our business relationships with participating brands are generally established through licensing or manufacturing arrangements.

 

Under licensing arrangements , we license the right to manufacture, distribute and sell the finished products through our distribution channels using the brand owners’ marks.  For the right to use a brand owner’s mark, we pay a royalty to the brand owner based on our sales of finished products that contain the brand owner’s mark.

 

Under manufacturing arrangements , we manufacture finished beverage products using raw materials sourced by us or provided by the brand owner.  In both instances, once the manufacturing process is complete, we sell the finished product either to the brand owner or to our customers.  Under certain manufacturing arrangements, our sole customer is the brand owner and we are prohibited from selling the beverage products to other types of customers through our distribution channels.  Under other manufacturing arrangements, in addition to manufacturing the beverage for sale to the brand owner, we have the right to sell the beverages using the brand owner’s marks in certain of our channels through a licensing arrangement, as described above.

 

No individual licensing or manufacturing arrangement (including arrangements covering multiple brands) has generated net sales that have been significant to our consolidated net sales (i.e., no arrangement has accounted for more than 10% of our consolidated net sales in any period).  We analyze the impact of each arrangement on consolidated net sales on an individual basis.  We have determined that it is unlikely that we would lose our licensing or manufacturing rights to multiple brands at the same time.  Each of our licensing and manufacturing arrangements are separately negotiated with unrelated parties, and each has distinct terms and conditions, including the duration of agreement and termination rights.  Further, based upon the number of business relationships as well as the depth of our owned-brands, it is our belief that no individual business relationship is critical to the execution of our growth strategy.

 

Management is focused on executing our growth strategy to drive Keurig ®  Single Cup Brewer adoption in households and offices in the U.S. and Canada in order to generate ongoing demand for packs.

 

We compete not only with other widely advertised branded products, but also with private label or generic products that generally are sold at lower prices.  In September 2012, two patents associated with our K-Cup ®  packs expired, and certain third-parties have launched competing products in the form of established unlicensed national and regional brands and unlicensed private label packs.

 

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For the first fiscal quarter of 2014, our net sales of $1,386.7 million represented growth of 4% over the first fiscal quarter of 2013 (“the prior year period”).  Gross profit for the first fiscal quarter of fiscal 2014 was $464.0 million, or 33.5% of net sales, as compared to $419.2 million, or 31.3% of net sales for the prior year period.  For the first fiscal quarter of 2014, selling, operating, and general and administrative expenses (“SG&A”) increased 0.3% to $237.4 million from $236.7 million for the prior year period.  As a percentage of sales, SG&A expenses decreased to 17.1% in the first fiscal quarter of 2014 from 17.7% in the prior year period.  Our operating margin improved to 16.3% in the first fiscal quarter of 2014 from 13.6% in the prior year period.

 

We continually monitor all costs, including coffee, as we review our pricing structure as cyclical swings in commodity markets are common.  The recent years have seen significant volatility in the “C” price of coffee (i.e., the price per pound quoted by the Intercontinental Exchange).  We expect coffee prices to remain volatile in the coming years.

 

We offer a one-year warranty on all Keurig ®  Single Cup Brewers we sell and provide for the estimated cost of product warranties, primarily using historical information and current repair or replacement costs, at the time product revenue is recognized.  In addition, sales of Keurig ®  Single Cup Brewers are recognized net of an allowance for returns using an average return rate based on historical experience and an evaluation of contractual rights or obligations.  We focus some of our research and development efforts on improving brewer reliability, strengthening its quality controls and product testing procedures.  As we have grown, we have added significantly to our product testing, quality control infrastructure and overall quality processes.  As we continue to innovate, and our products become more complex, both in design and componentry, product performance may modulate, causing warranty or sales returns rates to possibly fluctuate going forward.  As a result, future warranty claims rates may be higher or lower than we are currently experiencing and for which we are currently providing for in our warranty or sales return reserves.

 

We generated $272.7 million in cash from operating activities during the thirteen weeks ended December 28, 2013 as compared to $337.1 million during the thirteen weeks ended December 29, 2012.  During the thirteen weeks ended December 28, 2013 we primarily used cash generated from operating activities to reduce our borrowings under long-term debt obligations by $3.2 million, fund capital expenditures of $60.8 million and repurchase shares of our common stock for $122.5 million.

 

We consistently analyze our short-term and long-term cash requirements to continue to grow the business.  In addition to funding share repurchases and cash dividends, we expect most of our cash generated from operations will continue to be used to fund capital expenditures and the working capital required for our growth over the next few years.

 

Business Segments

 

We have historically managed our 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, our Board of Directors authorized 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 the Domestic segment and the results of Canadian operations are in the “Canada” segment.  As a result of the consolidation of U.S. operations, we have recast all historical segment results in order to provide data that is on a basis consistent with our new structure.  See Note 3, Segment Reporting , of the Notes to Unaudited Consolidated Financial Statements included in this Quarterly Report.

 

We evaluate the performance of our 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.  Our 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 our senior executive officers and other selected employees who perform duties related to the entire enterprise.  Corporate Unallocated expenses also include depreciation for corporate headquarters, sustainability expenses, 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.

 

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Basis of Presentation

 

Included in this presentation are discussions and reconciliations of net income and diluted earnings per share in accordance with accounting principles generally accepted in the United States of America (“GAAP”) to net income and diluted earnings per share excluding certain expenses and losses.  We refer to these performance measures as non-GAAP net income and non-GAAP net income per share.  These non-GAAP measures exclude legal and accounting expenses related to the Securities and Exchange Commission (“SEC”) inquiry and pending securities and stockholder derivative class action litigation and non-cash acquisition-related items such as amortization of identifiable intangibles, each of which include adjustments to show the tax impact of excluding these items.  Each of these adjustments was selected because management uses these non-GAAP measures in discussing and analyzing its results of operations and because we believe the non-GAAP measures provide investors with greater transparency by helping to illustrate the underlying financial and business trends relating to our results of operations and financial condition and comparability between current and prior periods.  For example, we excluded legal and accounting expenses related to the SEC inquiry and pending securities and stockholder derivative class action litigation because these expenses can vary from period to period and expenses associated with these activities are not considered a key measure of our operating performance.

 

We use the non-GAAP measures to establish and monitor budgets and operational goals and to evaluate our performance.  These non-GAAP measures are not in accordance with, or an alternative to, GAAP and should be considered in addition to, and not as a substitute or superior to, the other measures of financial performance prepared in accordance with GAAP.  Using only the non-GAAP financial measures to analyze our performance would have material limitations because their calculation is based on the subjective determination of management regarding the nature and classification of events and circumstances that investors may find significant.  We compensate for these limitations by presenting both the GAAP and non-GAAP measures of its results.

 

Results of Operations

 

Summary financial data of the Company

 

The following table presents certain financial data of the Company expressed as a percentage of net sales for the periods denoted below:

 

 

 

Thirteen weeks ended

 

 

 

December 28,
2013

 

December 29,
2012

 

Net sales

 

100.0

%

100.0

%

Cost of sales

 

66.5

%

68.7

%

Gross profit

 

33.5

%

31.3

%

 

 

 

 

 

 

Selling and operating expenses

 

12.1

%

12.8

%

General and administrative expenses

 

5.0

%

4.8

%

Operating income

 

16.3

%*

13.6

%*

 

 

 

 

 

 

Other income, net

 

0.0

%

0.0

%

Gain on financial instruments, net

 

0.3

%

0.1

%

Loss on foreign currency, net

 

(0.8

)%

(0.2

)%

Interest expense

 

(0.2

)%

(0.4

)%

Income before income taxes

 

15.8

%*

13.1

%

 

 

 

 

 

 

Income tax expense

 

(5.8

)%

(5.0

)%

Net income

 

10.0

%

8.1

%

 

 

 

 

 

 

Net income attributable to noncontrolling interests

 

0.0

%

0.0

%

 

 

 

 

 

 

Net income attributable to GMCR

 

10.0

%

8.0

%*

 


* Does not sum due to rounding.

 

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Segment Summary

 

Net sales and operating income for each of our operating segments are summarized in the tables below:

 

 

 

Net sales (in millions)

 

 

 

Thirteen weeks ended

 

 

 

December 28,
2013

 

December 29,
2012

 

Domestic

 

$

1,191.9

 

$

1,132.0

 

Canada

 

194.8

 

207.1

 

Total net sales

 

$

1,386.7 <