Keurig Green Mountain, Inc.
KEURIG GREEN MOUNTAIN, INC. (Form: 10-Q, Received: 08/05/2015 16:37:34)

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 June 27, 2015

 

OR

 

o

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

 

For the transition period from                      to                     

 

Keurig Green Mountain, Inc.

 

 

Commission file number 1-12340

 

Delaware

 

03-0339228

(State or other jurisdiction of
incorporation or organization)

 

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

 

33 Coffee Lane, Waterbury, Vermont 05676

(Address of principal executive offices)  (Zip code)

 

(802) 244-5621

(Registrants’ telephone number, including area code)

 

 

(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 July 30, 2015, 154,058,161 shares of common stock of the registrant were outstanding.

 

 

 



Table of Contents

 

KEURIG GREEN MOUNTAIN, INC.

Form 10-Q

For the Thirteen Weeks Ended June 27, 2015

 

Table of Contents

 

 

 

Page

PART I. FINANCIAL INFORMATION

1

Item 1.

Financial Statements

1

 

Unaudited Consolidated Balance Sheets

2

 

Unaudited Consolidated Statements of Operations

3

 

Unaudited Consolidated Statements of Comprehensive Income

4

 

Unaudited Consolidated Statement of Changes in Stockholders’ Equity

6

 

Unaudited Consolidated Statements of Cash Flows

7

 

Notes to Unaudited Consolidated Financial Statements

8

Item 2.

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

31

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

48

Item 4.

Controls and Procedures

50

 

 

 

PART II. OTHER INFORMATION

51

Item 1.

Legal Proceedings

51

Item 1A.

Risk Factors

51

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

51

Item 6.

Exhibits

51

Signatures

52

 



Table of Contents

 

Part I.  Financial Information

Item 1.  Financial Statements

 

1



Table of Contents

 

KEURIG GREEN MOUNTAIN, INC.

Unaudited Consolidated Balance Sheets

(Dollars in thousands, except per share data)

 

 

 

June 27,
2015

 

September 27,
2014

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

80,318

 

$

761,214

 

Restricted cash and cash equivalents

 

243

 

378

 

Short-term investment

 

 

100,000

 

Receivables, less uncollectible accounts and return allowances of $36,186 and $66,120 at June 27, 2015 and September 27, 2014, respectively

 

441,273

 

621,451

 

Inventories

 

688,695

 

835,167

 

Income taxes receivable

 

26,344

 

 

Other current assets

 

98,950

 

69,272

 

Deferred income taxes, net

 

62,203

 

58,038

 

Total current assets

 

1,398,026

 

2,445,520

 

 

 

 

 

 

 

Fixed assets, net

 

1,324,408

 

1,171,425

 

Intangibles, net

 

454,786

 

365,444

 

Goodwill

 

773,825

 

755,895

 

Deferred income taxes, net

 

233

 

131

 

Long-term restricted cash

 

24,967

 

 

Other long-term assets

 

18,242

 

58,892

 

 

 

 

 

 

 

Total assets

 

$

3,994,487

 

$

4,797,307

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Current portion of long-term debt

 

$

302

 

$

19,077

 

Current portion of capital lease and financing obligations

 

3,184

 

2,226

 

Accounts payable

 

264,860

 

411,107

 

Accrued expenses

 

207,305

 

305,677

 

Income tax payable

 

 

53,586

 

Dividend payable

 

44,281

 

40,580

 

Deferred income taxes, net

 

270

 

340

 

Other current liabilities

 

4,521

 

10,395

 

Total current liabilities

 

524,723

 

842,988

 

 

 

 

 

 

 

Long-term debt, less current portion

 

295,205

 

140,937

 

Capital lease and financing obligations, less current portion

 

114,819

 

116,240

 

Deferred income taxes, net

 

208,140

 

202,936

 

Other long-term liabilities

 

53,277

 

23,085

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Redeemable noncontrolling interests

 

4,466

 

12,440

 

 

 

 

 

 

 

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 - 154,021,260 and 162,318,246 shares at June 27, 2015 and September 27, 2014, respectively

 

15,402

 

16,232

 

Additional paid-in capital

 

962,349

 

1,808,881

 

Retained earnings

 

1,964,095

 

1,687,619

 

Accumulated other comprehensive loss

 

(147,989

)

(54,051

)

Total stockholders’ equity

 

2,793,857

 

3,458,681

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

3,994,487

 

$

4,797,307

 

 

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

 

2



Table of Contents

 

KEURIG GREEN MOUNTAIN, INC.

Unaudited Consolidated Statements of Operations

(Dollars in thousands, except per share data)

 

 

 

Thirteen weeks ended

 

Thirty-nine weeks ended

 

 

 

June 27,
2015

 

June 28,
2014

 

June 27,
2015

 

June 28,
2014

 

Net sales

 

$

969,525

 

$

1,022,371

 

$

3,483,067

 

$

3,512,113

 

Cost of sales

 

620,265

 

577,779

 

2,210,877

 

2,146,042

 

Gross profit

 

349,260

 

444,592

 

1,272,190

 

1,366,071

 

 

 

 

 

 

 

 

 

 

 

Selling and operating expenses

 

115,040

 

127,855

 

427,902

 

421,075

 

General and administrative expenses

 

72,861

 

85,390

 

223,025

 

226,537

 

Operating income

 

161,359

 

231,347

 

621,263

 

718,459

 

 

 

 

 

 

 

 

 

 

 

Other income, net

 

1,997

 

253

 

2,347

 

1,935

 

(Loss) gain on financial instruments, net

 

(1,814

)

(2,843

)

5,110

 

4,618

 

Gain (loss) on foreign currency, net

 

1,706

 

8,849

 

(16,178

)

(10,423

)

Interest expense

 

(386

)

(2,441

)

(1,754

)

(8,056

)

Income before income taxes

 

162,862

 

235,165

 

610,788

 

706,533

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

(49,156

)

(79,789

)

(206,822

)

(250,369

)

Net income

 

$

113,706

 

$

155,376

 

$

403,966

 

$

456,164

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to noncontrolling interests

 

85

 

225

 

287

 

702

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to Keurig

 

$

113,621

 

$

155,151

 

$

403,679

 

$

455,462

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to Keurig per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.74

 

$

0.95

 

$

2.55

 

$

2.93

 

Diluted

 

$

0.73

 

$

0.94

 

$

2.52

 

$

2.88

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared per common share

 

$

0.2875

 

$

0.25

 

$

0.8625

 

$

0.75

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

154,052,575

 

162,695,801

 

158,402,095

 

155,267,136

 

Diluted

 

155,597,520

 

164,693,146

 

160,106,729

 

157,922,095

 

 

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

 

3



Table of Contents

 

KEURIG GREEN MOUNTAIN, INC.

Unaudited Consolidated Statements of Comprehensive Income

(Dollars in thousands)

 

 

 

Thirteen weeks ended

 

Thirteen weeks ended

 

 

 

June 27, 2015

 

June 28, 2014

 

 

 

Pre-tax

 

Tax
(expense)
benefit

 

After-tax

 

Pre-tax

 

Tax
(expense)
benefit

 

After-tax

 

Net income

 

 

 

 

 

$

113,706

 

 

 

 

 

$

155,376

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized losses arising during the period

 

$

(93

)

$

(9

)

$

(102

)

$

(593

)

$

183

 

$

(410

)

(Gains) losses reclassified to net income

 

(3,441

)

1,391

 

(2,050

)

2,491

 

(1,023

)

1,468

 

Foreign currency translation adjustments

 

19,874

 

 

19,874

 

24,094

 

 

24,094

 

Other comprehensive gain

 

$

16,340

 

$

1,382

 

$

17,722

 

$

25,992

 

$

(840

)

$

25,152

 

Total comprehensive income

 

 

 

 

 

131,428

 

 

 

 

 

180,528

 

Total comprehensive income attributable to noncontrolling interests

 

 

 

 

 

188

 

 

 

 

 

795

 

Total comprehensive income attributable to Keurig

 

 

 

 

 

$

131,240

 

 

 

 

 

$

179,733

 

 

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

 

4



Table of Contents

 

KEURIG GREEN MOUNTAIN, INC.

Unaudited Consolidated Statements of Comprehensive Income

(Dollars in thousands)

 

 

 

Thirty-nine weeks ended

 

Thirty-nine weeks ended

 

 

 

June 27, 2015

 

June 28, 2014

 

 

 

Pre-tax

 

Tax
(expense)
benefit

 

After-tax

 

Pre-tax

 

Tax
(expense)
benefit

 

After-tax

 

Net income

 

 

 

 

 

$

403,966

 

 

 

 

 

$

456,164

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains arising during the period

 

$

209

 

$

(97

)

$

112

 

$

17,663

 

$

(7,150

)

$

10,513

 

(Gains) losses reclassified to net income

 

(11,059

)

4,457

 

(6,602

)

3,933

 

(1,604

)

2,329

 

Foreign currency translation adjustments

 

(87,446

)

 

(87,446

)

(22,150

)

 

(22,150

)

Other comprehensive loss

 

$

(98,296

)

$

4,360

 

$

(93,936

)

$

(554

)

$

(8,754

)

$

(9,308

)

Total comprehensive income

 

 

 

 

 

310,030

 

 

 

 

 

446,856

 

Total comprehensive income attributable to noncontrolling interests

 

 

 

 

 

288

 

 

 

 

 

219

 

Total comprehensive income attributable to Keurig

 

 

 

 

 

$

309,742

 

 

 

 

 

$

446,637

 

 

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

 

5



Table of Contents

 

KEURIG GREEN MOUNTAIN, INC.

Unaudited Consolidated Statement of Changes in Stockholders’ Equity

For the Thirty-nine Weeks Ended June 27, 2015

(Dollars in thousands)

 

 

 

Common stock

 

Additional paid-

 

Retained

 

Accumulated
other
comprehensive

 

Stockholders’

 

 

 

Shares

 

Amount

 

in capital

 

earnings

 

loss

 

equity

 

Balance at September 27, 2014

 

162,318,246

 

$

16,232

 

$

1,808,881

 

$

1,687,619

 

$

(54,051

)

$

3,458,681

 

Options exercised

 

464,261

 

46

 

10,632

 

 

 

10,678

 

Restricted stock awards and units

 

196,705

 

20

 

(20

)

 

 

 

Issuance of common stock under employee stock purchase plan

 

82,479

 

8

 

7,932

 

 

 

7,940

 

Repurchase of common stock

 

(9,040,431

)

(904

)

(917,452

)

 

 

(918,356

)

Stock compensation expense

 

 

 

30,823

 

 

 

30,823

 

Tax benefit from equity-based compensation plans

 

 

 

21,084

 

 

 

21,084

 

Deferred compensation expense

 

 

 

469

 

 

 

469

 

Adjustment of redeemable noncontrolling interests to redemption value

 

 

 

 

7,923

 

 

7,923

 

Other comprehensive loss, net of tax

 

 

 

 

 

(93,938

)

(93,938

)

Net income attributable to Keurig

 

 

 

 

403,679

 

 

403,679

 

Cash dividends declared

 

 

 

 

(135,126

)

 

(135,126

)

Balance at June 27, 2015

 

154,021,260

 

$

15,402

 

$

962,349

 

$

1,964,095

 

$

(147,989

)

$

2,793,857

 

 

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

 

6



Table of Contents

 

KEURIG GREEN MOUNTAIN, INC.

Unaudited Consolidated Statements of Cash Flows

(Dollars in thousands)

 

 

 

Thirty-nine

 

Thirty-nine

 

 

 

weeks ended

 

weeks ended

 

 

 

June 27,
2015

 

June 28,
2014

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

403,966

 

$

456,164

 

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

 

 

 

 

 

Depreciation and amortization of fixed assets

 

154,338

 

159,189

 

Amortization of intangibles

 

35,768

 

32,628

 

Amortization of deferred financing fees

 

4,238

 

4,238

 

Unrealized (gain) loss on foreign currency, net

 

1,184

 

5,869

 

Loss (gain) on disposal of fixed assets

 

489

 

(603

)

Provision for doubtful accounts

 

4,020

 

2,294

 

Provision for sales returns

 

86,999

 

65,853

 

Gain on derivatives, net

 

(12,968

)

(2,082

)

Excess tax benefits from equity-based compensation plans

 

(21,082

)

(52,659

)

Deferred income taxes

 

5,936

 

(1,206

)

Deferred compensation and stock compensation

 

31,292

 

23,488

 

Other

 

2,199

 

1,020

 

Changes in assets and liabilities, net of acquisition:

 

 

 

 

 

Receivables

 

84,360

 

14,579

 

Inventories

 

137,718

 

34,433

 

Income tax receivable/payable, net

 

(59,324

)

62,656

 

Other current assets

 

(30,166

)

2,622

 

Other long-term assets, net

 

917

 

2,851

 

Accounts payable and accrued expenses

 

(222,979

)

28,117

 

Other current liabilities

 

(1,084

)

(10,419

)

Other long-term liabilities

 

4,281

 

(5,264

)

Net cash provided by operating activities

 

610,102

 

823,768

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Change in restricted cash

 

135

 

90

 

Maturity of short-term investment

 

100,000

 

 

Acquisition, net of cash acquired

 

(180,698

)

 

Capital expenditures for fixed assets

 

(338,124

)

(221,887

)

Purchase of long-term investment

 

 

(10,000

)

Other investing activities

 

(1,353

)

1,235

 

Net cash used in investing activities

 

(420,040

)

(230,562

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Net change in revolving line of credit

 

150,000

 

 

Proceeds from sale of common stock

 

 

1,348,414

 

Proceeds from issuance of common stock under compensation plans

 

18,618

 

33,143

 

Repurchase of common stock

 

(918,356

)

(997,386

)

Excess tax benefits from equity-based compensation plans

 

21,082

 

52,659

 

Payments on capital lease and financing obligations

 

(2,193

)

(1,444

)

Repayment of long-term debt

 

(14,355

)

(9,798

)

Dividends paid

 

(131,425

)

(77,705

)

Other financing activities

 

(340

)

(436

)

Net cash (used in) provided by financing activities

 

(876,969

)

347,447

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

6,011

 

2,966

 

 

 

 

 

 

 

Net (decrease) increase in cash and cash equivalents

 

(680,896

)

943,619

 

Cash and cash equivalents at beginning of period

 

761,214

 

260,092

 

Cash and cash equivalents at end of period

 

$

80,318

 

$

1,203,711

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

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

 

$

42,792

 

$

59,646

 

Dividends declared not paid at the end of each period

 

$

44,281

 

$

40,653

 

Noncash investing and financing activities:

 

 

 

 

 

Fixed assets acquired under capital lease and financing obligations

 

$

375

 

$

33,821

 

 

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

 

7



Table of Contents

 

Keurig Green Mountain, Inc.

Notes to Unaudited Consolidated Financial Statements

 

1.               Basis of Presentation

 

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 27, 2014 balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP.  For further information, refer to the consolidated financial statements and the footnotes included in Keurig Green Mountain’s Annual Report on Form 10-K for the fiscal year ended September 27, 2014.  Throughout this presentation, we refer to the consolidated company as the “Company” or “Keurig” 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 April 2015, the Financial Accounting Standards Board (“FASB”) issued ASU No.  2015-03 - Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”), which changes the presentation of debt issuance costs in financial statements.  Under ASU 2015-03, an entity will present such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset.  Amortization of the costs will continue to be reported as interest expense.  ASU 2015-03 is effective retrospectively for interim and annual periods beginning after December 15, 2015.  The Company expects to adopt ASU 2015-03 beginning on September 25, 2016 and the adoption of the new guidance is not expected to have a material impact on the Company’s financial condition or financial statement disclosures.

 

In April 2015, the FASB issued ASU No.  2015-05 - Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement (an update to Subtopic 350-40, Intangibles - Goodwill and Other - Internal-Use Software ) (“ASU 2015-05”), which provides guidance on accounting for cloud computing fees.  If a cloud computing arrangement includes a software license, then the customer should account for the license element of the arrangement consistent within the acquisition of other software licenses.  If a cloud computing arrangement does not include a software license, the arrangement should be accounted for as a service contract.  ASU 2015-05 is effective for arrangements entered into, or materially modified, in interim and annual periods beginning after December 15, 2015.  Retrospective application is permitted but not required.  Management is currently evaluating the impact of ASU 2015-05 on the consolidated financial statements.

 

3.      Segment Reporting

 

Segment information is prepared on the same basis that our CEO, who is our chief operating decision maker, manages the business, evaluates financial results, and makes key operating decisions.  The structure includes a Domestic segment containing all U.S.  Operations and immaterial operations related to international expansion, and a Canada segment containing all Canadian operations.

 

The Domestic segment sells brewers, accessories, and sources, produces and sells coffee, hot cocoa, teas and other beverages in K-Cup ® , Vue ® , Rivo ® , K-Carafe , K-Mug , and Bolt  pods (“pods”, formerly referred to as portion packs) and coffee in more traditional packaging including bags and fractional packages 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 the Company’s website.  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 At Home (“AH”) channel.  The Domestic segment also earns royalty income from pods sold by a third-party licensed roaster.

 

The Canada segment sells brewers, accessories, and sources, produces and sells coffee and teas and other beverages in pods and coffee in more traditional packaging including bags, cans and fractional packages 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.

 

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Management evaluates the performance of the Company’s operating segments based on several factors, including net sales to external customers and operating income.  Net sales are recorded on a segment basis and intersegment sales are eliminated as part of the financial consolidation process.  Operating income represents gross profit less selling, operating, general and administrative expenses.  The Company’s manufacturing operations occur within both the Domestic and Canada segments, and the costs of manufacturing are recognized in cost of sales in the operating segment in which the sale occurs.  Information system technology services are mainly centralized while finance and accounting functions are primarily decentralized.  Expenses consisting primarily of compensation and depreciation related to certain centralized administrative functions, including information system technology, are allocated to the operating segments.

 

Expenses not specifically related to an operating segment are presented under “Corporate Unallocated.”  Corporate Unallocated expenses are comprised mainly of the compensation and other related expenses of certain of the Company’s senior executive officers and other selected employees who perform duties related to the entire enterprise.  Corporate Unallocated expenses also include depreciation for corporate headquarters, corporate sustainability expenses, interest expense not directly attributable to an operating segment, the majority of foreign exchange gains or losses, legal expenses, and compensation of the Board of Directors.

 

The following tables summarize selected financial data for segment disclosures for the thirteen and thirty-nine weeks ended June 27, 2015 and June 28, 2014, respectively:

 

 

 

Thirteen weeks ended June 27, 2015

 

 

 

(Dollars in thousands)

 

 

 

Domestic

 

Canada

 

Corporate-

Unallocated

 

Consolidated

 

Net sales

 

$

847,922

 

$

121,603

 

$

 

$

969,525

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

$

172,603

 

$

25,850

 

$

(37,094

)

$

161,359

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

$

49,397

 

$

12,820

 

$

3,000

 

$

65,217

 

 

 

 

 

 

 

 

 

 

 

Stock compensation

 

$

5,128

 

$

489

 

$

3,715

 

$

9,332

 

 

 

 

Thirteen weeks ended June 28, 2014

 

 

 

(Dollars in thousands)

 

 

 

Domestic

 

Canada

 

Corporate-
Unallocated

 

Consolidated

 

Net sales

 

$

881,102

 

$

141,269

 

$

 

$

1,022,371

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

$

250,486

 

$

24,781

 

$

(43,920

)

$

231,347

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

$

48,205

 

$

15,329

 

$

2,119

 

$

65,653

 

 

 

 

 

 

 

 

 

 

 

Stock Compensation

 

$

3,417

 

$

476

 

$

3,713

 

$

7,606

 

 

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Table of Contents

 

 

 

Thirty-nine weeks ended June 27, 2015

 

 

 

(Dollars in thousands)

 

 

 

Domestic

 

Canada

 

Corporate-
Unallocated

 

Consolidated

 

Net Sales

 

$

3,063,930

 

$

419,137

 

$

 

$

3,483,067

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

$

678,107

 

$

65,835

 

$

(122,679

)

$

621,263

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

$

142,035

 

$

39,425

 

$

8,646

 

$

190,106

 

 

 

 

 

 

 

 

 

 

 

Stock compensation

 

$

16,415

 

$

1,737

 

$

12,671

 

$

30,823

 

 

 

 

Thirty-nine weeks ended June 28, 2014

 

 

 

(Dollars in thousands)

 

 

 

Domestic

 

Canada

 

Corporate-
Unallocated

 

Consolidated

 

Net Sales

 

$

3,043,236

 

$

468,877

 

$

 

$

3,512,113

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

$

761,316

 

$

77,512

 

$

(120,369

)

$

718,459

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

$

137,986

 

$

47,292

 

$

6,539

 

$

191,817

 

 

 

 

 

 

 

 

 

 

 

Stock compensation

 

$

11,068

 

$

2,236

 

$

10,021

 

$

23,325

 

 

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

 

Thirty-nine weeks ended

 

 

 

June 27, 2015

 

June 28, 2014

 

June 27, 2015

 

June 28, 2014

 

Operating income

 

$

161,359

 

$

231,347

 

$

621,263

 

$

718,459

 

Other income, net

 

1,997

 

253

 

2,347

 

1,935

 

(Loss) gain on financial instruments, net

 

(1,814

)

(2,843

)

5,110

 

4,618

 

Gain (loss) on foreign currency, net

 

1,706

 

8,849

 

(16,178

)

(10,423

)

Interest expense

 

(386

)

(2,441

)

(1,754

)

(8,056

)

Income before income taxes

 

$

162,862

 

$

235,165

 

$

610,788

 

$

706,533

 

 

4.               Inventories

 

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

 

 

 

June 27,
2015

 

September 27,
2014

 

Raw materials and supplies

 

$

229,032

 

$

169,858

 

Finished goods

 

459,663

 

665,309

 

 

 

$

688,695

 

$

835,167

 

 

At June 27, 2015, the Company had approximately $402.2 million in green coffee purchase commitments, of which approximately 97% had a fixed price.  These commitments primarily extend through fiscal 2017.  The value of the variable portion of these commitments was calculated using an average “C” price of coffee of $1.41 per pound at June 27, 2015.  In addition to its green coffee commitments, the Company had approximately $249.7 million in fixed price brewer and related accessory purchase commitments and $1,027.9 million in production raw material commitments at June 27, 2015.  The Company believes based on relationships established with its suppliers, that the risk of non-delivery on such purchase commitments is remote.

 

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As of June 27, 2015, minimum future inventory purchase commitments were as follows (in thousands):

 

Fiscal Year

 

Inventory
Purchase
Obligations(1)

 

Remainder of 2015

 

$

451,761

 

2016

 

498,478

 

2017

 

266,488

 

2018

 

277,188

 

2019

 

120,123

 

Thereafter

 

65,762

 

 

 

$

1,679,800

 

 


(1)          Certain purchase obligations are determined based on a contractual percentage of forecasted volumes.

 

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5.               Acquisition

 

On December 18, 2014, the Company, through its wholly owned subsidiary Keurig International S.à.r.l., acquired all of the outstanding equity of MDS Global Holding p.l.c.  (“Bevyz”), a manufacturer and distributor of an all-in-one drink system, for total cash consideration of $180.7 million, net of cash acquired.  The Company currently intends to hold the rights to the technology acquired to prevent others from using such technology.  Such defensive action likely contributes to the value of the Company’s Keurig ®  Kold beverage system.  The goodwill represents the excess value of the purchase price over the aggregate fair value of the tangible and intangible assets acquired.  The goodwill primarily represents the intangible assets that do not qualify for separate recognition, such as expected synergies from combined operations and assembled workforces, and the future development initiatives of the assembled workforces.  The goodwill and intangible assets recognized in the acquisition are not deductible for tax purposes.

 

Prior to the acquisition, the Company owned approximately 15% of the outstanding equity of Bevyz.  During the second quarter ended March 28, 2015, the Company completed its valuation of the fair value of the business acquired and the acquisition date fair value of the Company’s previously held equity interest in Bevyz with the exception of the tax impact of the transaction.  The fair value for 100% of Bevyz identifiable assets less liabilities assumed was determined using an income approach.  The excess of (i) the sum of the consideration for the shares purchased on December 18, 2014 and the acquisition date fair value of the Company’s previously held equity interest in Bevyz, over (ii) 100% of the fair value of identifiable assets acquired less liabilities assumed, was recognized as goodwill.  The acquisition date fair value of the Company’s previously held equity interest in Bevyz was determined using a market approach, specifically prior transactions in shares of Bevyz, which resulted in the recognition of a $1.5 million loss included in other income, net in the accompanying unaudited consolidated statements of operations for the thirty-nine weeks ended June 27, 2015.  Amortizable intangible assets acquired, valued at the date of acquisition, include approximately $161.7 million for defensive intangible assets, $3.8 million for non-compete agreements and $1.6 million for contractual agreements.  Amortizable intangible assets are amortized on a straight-line basis over their respective useful lives, and the weighted-average amortization period is 12.8 years.

 

The following summarizes the allocation of fair value (in thousands):

 

Accounts receivable

 

$

218

 

Inventories

 

743

 

Other current assets

 

504

 

Fixed assets

 

2,370

 

Other long-term assets

 

247

 

Intangibles

 

167,085

 

Goodwill

 

60,179

 

Accounts payable and accrued expenses

 

(5,911

)

Capital lease obligation

 

(763

)

Deferred tax liability

 

(8,325

)

Other long-term liabilities

 

(1,274

)

Total estimated fair value net assets acquired

 

215,073

 

Less fair value of previously held equity interest in Bevyz

 

(34,375

)

Total cash paid, net of cash acquired

 

$

180,698

 

 

Acquisition costs of $1.5 million were expensed as incurred and recognized in general and administrative expenses in the first quarter of fiscal 2015.  Approximately $25.0 million of the purchase price was held in escrow at June 27, 2015 and is included in long-term restricted cash and other long-term liabilities.  The revenue and earnings of Bevyz since acquisition and the proforma financial statements are immaterial.  For information on the assignment of goodwill to our operating segments, see Note 7, Goodwill and Intangible Assets .

 

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6.               Fixed Assets

 

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

 

 

 

Useful Life in Years

 

June 27,
2015

 

September 27,
2014

 

Production equipment

 

1-15

 

$

831,936

 

$

779,850

 

Coffee service equipment

 

3-7

 

57,150

 

61,029

 

Computer equipment and software

 

1-10

 

255,133

 

177,878

 

Land

 

Indefinite

 

12,345

 

12,767

 

Building and building improvements

 

4-30

 

251,189

 

238,945

 

Furniture and fixtures

 

1-15

 

35,843

 

36,899

 

Vehicles

 

4-5

 

12,445

 

13,032

 

Leasehold improvements

 

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

 

118,221

 

95,373

 

Assets acquired under capital leases

 

5-15

 

42,001

 

41,200

 

Construction-in-progress

 

 

 

397,718

 

308,976

 

Total fixed assets

 

 

 

$

2,013,981

 

$

1,765,949

 

Accumulated depreciation and amortization

 

 

 

(689,573

)

(594,524

)

 

 

 

 

$

1,324,408

 

$

1,171,425

 

 

Assets acquired under capital leases, net of accumulated amortization, were $32.8 million and $34.1 million at June 27, 2015 and September 27, 2014, respectively.

 

Total depreciation and amortization expense relating to all fixed assets was $52.6 million and $55.0 million for the thirteen weeks ended June 27, 2015 and June 28, 2014, respectively.  Total depreciation and amortization expense relating to all fixed assets was $154.3 million and $159.2 million for the thirty-nine weeks ended June 27, 2015 and June 28, 2014, respectively.

 

7.               Goodwill and Intangible Assets

 

The following represented the change in the carrying amount of goodwill by segment for the thirty-nine weeks ended June 27, 2015 (in thousands):

 

 

 

Domestic

 

Canada

 

Total

 

Balance at September 27, 2014

 

$

369,353

 

$

386,542

 

$

755,895

 

Acquisition of Bevyz (See Note 5, Acquisition )

 

60,179

 

 

60,179

 

Foreign currency effect

 

(5,721

)

(36,528

)

(42,249

)

Balance at June 27, 2015

 

$

423,811

 

$

350,014

 

$

773,825

 

 

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

 

 

 

June 27, 2015

 

September 27, 2014

 

Trade names

 

$

81,728

 

$

90,257

 

 

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Intangible Assets Subject to Amortization

 

Definite-lived intangible assets included in the Domestic segment and Canada segment consisted of the following (in thousands) as of:

 

 

 

 

 

June 27, 2015

 

September 27, 2014

 

 

 

Useful Life in
Years

 

Gross Carrying
Amount

 

Accumulated
Amortization

 

Gross Carrying
Amount

 

Accumulated
Amortization

 

Acquired technology

 

4-15

 

$

17,905

 

$

(14,967

)

$

16,501

 

$

(13,713

)

Defensive intangible assets(1)

 

13

 

146,379

 

(5,846

)

 

 

Customer and roaster agreements

 

10-11

 

8,423

 

(5,671

)

8,939

 

(5,303

)

Customer relationships

 

2-16

 

362,521

 

(155,683

)

390,563

 

(141,163

)

Trade names

 

5-11

 

35,844

 

(18,670

)

35,911

 

(16,548

)

Non-compete agreements

 

3-5

 

3,411

 

(588

)

 

 

Total

 

 

 

$

574,483

 

$

(201,425

)

$

451,914

 

$

(176,727

)

 


(1)          See Note 5, Acquisition for discussion of defensive intangible assets acquired in connection with Bevyz acquisition.

 

Definite-lived intangible assets are amortized on a straight-line basis over the period of expected economic benefit.  Total amortization expense was $12.6 million and $10.7 million for the thirteen weeks ended June 27, 2015 and June 28, 2014, respectively.  Total amortization expense was $35.8 million and $32.6 million for the thirty-nine weeks ended June 27, 2015 and June 28, 2014, respectively.

 

The estimated aggregate amortization expense for the remainder of fiscal 2015, for each of the next five years and thereafter, is as follows (in thousands):

 

Fiscal Year

 

Amortization Expense

 

Remainder of 2015

 

$

12,627

 

2016

 

49,926

 

2017

 

48,528

 

2018

 

47,654

 

2019

 

47,288

 

2020

 

43,194

 

Thereafter

 

123,841

 

 

8.               Product Warranties

 

The Company offers a one-year warranty on all Keurig ®  hot beverage system 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.

 

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The changes in the carrying amount of product warranties for the thirteen and thirty-nine weeks ended June 27, 2015 and June 28, 2014 are as follows (in thousands):

 

 

 

Thirteen weeks ended

 

Thirty-nine weeks ended

 

 

 

June 27, 2015

 

June 28, 2014

 

June 27, 2015

 

June 28, 2014

 

Balance, beginning of period

 

$

17,927

 

$

8,525

 

$

12,850

 

$

7,804

 

Provision related to current period

 

4,095

 

3,371

 

24,056

 

18,435

 

Change in estimate

 

 

(145

)

1,079

 

(2,628

)

Usage

 

(5,913

)

(4,716

)

(21,876

)

(16,576

)

Balance, end of period

 

$

16,109

 

$

7,035

 

$

16,109

 

$

7,035

 

 

For the thirteen and thirty-nine weeks ended June 27, 2015 the Company recorded recoveries of $0.3 million and $1.0 million, respectively.  For the thirteen and thirty-nine weeks ended June 28, 2014 the Company recorded recoveries of $0.2 million and $0.9 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.

 

9.               Noncontrolling Interests

 

Noncontrolling interests (“NCI”) are evaluated by the Company and are shown as either a liability, temporary equity (shown between liabilities and equity) or as permanent equity depending on the nature of the redeemable features at amounts based on formulas specific to each entity.  Generally, mandatorily redeemable NCIs are classified as liabilities and non-mandatorily redeemable NCIs are classified as either temporary or permanent equity.  Redeemable NCIs that are not mandatorily redeemable are classified outside of stockholders’ equity in the Unaudited Consolidated Balance Sheets as temporary equity under the caption, Redeemable noncontrolling interests, and are measured at their redemption values at the end of each period.  If the redemption value is greater than the carrying value, an adjustment is recorded in retained earnings to record the NCI at its redemption value.

 

Net income attributable to NCIs reflects the portion of the net income of consolidated entities applicable to the NCI stockholders 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 temporary equity attributable to the redeemable NCI for the thirty-nine weeks ended June 27, 2015 are as follows (in thousands):

 

 

 

Equity attributable
to redeemable
noncontrolling interest

 

Balance at September 27, 2014

 

$

12,440

 

Net income

 

287

 

Adjustment to redemption value

 

(7,923

)

Cash distributions

 

(340

)

Other comprehensive income

 

2

 

Balance at June 27, 2015

 

$

4,466

 

 

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10.        Derivative Financial Instruments

 

Cash Flow Hedges

 

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

 

The Company designates these contracts as cash flow hedges and measures the effectiveness of these derivative instruments at each balance sheet date.  The effective portion of the derivatives’ gains or losses, resulting from changes in the fair value of these instruments is classified in accumulated other comprehensive income (loss), net of related tax effects and is reclassified from other comprehensive income (“OCI”) into earnings in the same period or periods during which the hedged transaction affects earnings.  Any ineffective portion of the derivatives’ gains or losses is recognized in earnings in the period such ineffectiveness occurs.  If it is determined that a derivative is not highly effective, the gain or loss is reclassified into earnings.  In the third quarter of fiscal 2015, the Company reclassified a loss of $1.8 million from OCI into earnings due to the discontinuance of hedge accounting for interest rate swaps related to the prior Amended and Restated Credit Agreement (“Former Credit Agreement”).  See Note 17, Subsequent Events for additional information.

 

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 June 27, 2015, the Company had approximately 6 months remaining on a CDN $50.0 million cross currency swap to exchange interest payments and principal on the intercompany note.  This cross currency swap is not designated as a hedging instrument for accounting purposes and is recorded at fair value, with the changes in fair value recognized in the Unaudited Consolidated Statements of Operations.  Gains and losses resulting from the change in fair value are largely offset by the financial impact of the re-measurement of the intercompany note.  In accordance with the cross currency swap agreement, on a quarterly basis, the Company pays interest based on the three month Canadian Bankers’ Acceptance rate and receives interest based on the three month U.S. Libor rate.  Additional interest expense pursuant to the cross currency swap agreement for the thirteen and thirty-nine weeks ended June 27, 2015 was $0.1 million and $0.5 million, respectively, and for the thirteen and thirty-nine weeks ended June 28, 2014 was $0.3 million and $1.0 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 is exposed to credit loss in the event of nonperformance by the counterparties to these financial instruments, however nonperformance is not anticipated.

 

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

 

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

 

 

 

June 27, 2015

 

September 27, 2014

 

Balance Sheet Classification

 

Derivatives designated as cash flow hedges:

 

 

 

 

 

 

 

Interest rate swaps

 

 

(3,371

)

Other current liabilities

 

Coffee futures

 

 

3,437

 

Other current assets

 

Foreign currency forward contracts

 

(117

)

$

 

Other current liabilities

 

Foreign currency forward contracts

 

 

108

 

Other current assets

 

 

 

$

(117

)

$

174

 

 

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedges:

 

 

 

 

 

 

 

Interest rate swaps

 

(1,267

)

 

Other current liabilities

 

Cross currency swap

 

7,896

 

5,951

 

Other current assets

 

 

 

$

6,629

 

$

5,951

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

6,512

 

$

6,125

 

 

 

 

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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, the 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 U.S. 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 June 27, 2015 and September 27, 2014 is as follows (in thousands):

 

 

 

 

 

 

Gross

 

Net amount of

 

Gross amounts not offset in the

 

 

 

 

 

 

 

amounts offset

 

assets presented

 

Unaudited Consolidated

 

 

 

 

 

Gross

 

in the

 

in the

 

Balance Sheet

 

 

 

 

 

amounts of

 

Unaudited

 

Unaudited

 

 

 

Cash

 

 

 

 

 

recognized

 

Consolidated

 

Consolidated

 

Financial

 

collateral

 

 

 

 

 

assets

 

Balance Sheet

 

Balance Sheet

 

instruments

 

received

 

Net amount

 

Derivative assets, as of June 27, 2015

 

$

7,896

 

$

 

$

7,896

 

$

 

$

 

$

7,896

 

Derivative assets, as of September 27, 2014

 

9,830

 

(334

)

9,496

 

 

 

9,496

 

 

Offsetting of financial liabilities and derivative liabilities as of June 27, 2015 and September 27, 2014 is as follows (in thousands):

 

 

 

 

 

Gross

 

Net amount of

 

Gross amounts not offset in

 

 

 

 

 

 

 

amounts offset

 

liabilities

 

the Unaudited Consolidated

 

 

 

 

 

Gross

 

in the

 

presented in the

 

Balance Sheet

 

 

 

 

 

amounts of

 

Unaudited

 

Unaudited

 

 

 

Cash

 

 

 

 

 

recognized

 

Consolidated

 

Consolidated

 

Financial

 

collateral

 

 

 

 

 

liabilities

 

Balance Sheet

 

Balance Sheet

 

instruments

 

pledged

 

Net amount

 

Derivative liabilities, as of June 27, 2015

 

$

1,384

 

$

 

$

1,384

 

$

 

$

 

$

1,384

 

Derivative liabilities, as of September 27, 2014

 

3,705

 

(334

)

3,371

 

 

 

3,371

 

 

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

 

 

 

Thirteen weeks ended

 

Thirty-nine weeks ended

 

 

 

June 27, 2015

 

June 28, 2014

 

June 27, 2015

 

June 28, 2014

 

Cash Flow Hedges:

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

$

242

 

$

613

 

$

1,587

 

$

1,819

 

Coffee futures

 

 

(787

)

(1,288

)

15,998

 

Foreign currency forward contracts

 

(335

)

(419

)

(90

)

(154

)

Total

 

$

(93

)

$

(593

)

$

209

 

$

17,663

 

 

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

 

 

 

Thirteen weeks ended

 

Thirty-nine weeks ended

 

Location of Gains

 

 

 

June 27,

 

June 28,

 

June 27,

 

June 28,

 

(Losses) Reclassified

 

 

 

2015

 

2014

 

2015

 

2014

 

from OCI into Income

 

Coffee futures

 

$

5,239

 

$

(2,626

)

$

12,798

 

$

(4,067

)

Cost of sales

 

Foreign currency forward contracts

 

60

 

135

 

119

 

136

 

Cost of sales

 

Foreign currency forward contracts

 

(75

)

 

(75

)

(2

)

Gain (loss) on foreign currency, net

 

Interest rate swap

 

(1,783

)

 

(1,783

)

 

(Loss) gain on financial instruments, net

 

Total

 

$

3,441

 

$

(2,491

)

$

11,059

 

$

(3,933

)

 

 

 

The Company expects to reclassify $2.6 million of net gains, net of tax, from OCI to earnings for coffee derivatives within the next twelve months.

 

The following table summarizes the amount of net gains (losses), gross of tax, representing ineffectiveness on cash flow hedges recorded in income (in thousands):

 

 

 

Thirteen weeks ended

 

Thirty-nine weeks ended

 

Location of Net Gains (losses) in

 

 

 

 

 

June 28,

 

 

 

June 28,

 

Unaudited Consolidated

 

 

 

June 27, 2015

 

2014

 

June 27, 2015

 

2014

 

Statements of Operations

 

Coffee futures

 

$

 

$

(16

)

$

(94

)

$

1,306

 

Cost of sales

 

 

See Note 13, Stockholders’ Equity , for a reconciliation of derivatives in beginning accumulated other comprehensive income (loss) to derivatives in ending accumulated other comprehensive income (loss).

 

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

 

 

 

Thirteen weeks ended

 

Thirty-nine weeks ended

 

Location of Net Gain in

 

 

 

June 27,

 

June 28,

 

June 27,

 

June 28,

 

Unaudited Consolidated

 

 

 

2015

 

2014

 

2015

 

2014

 

Statements of Operations

 

Net (loss) gain on cross currency swap

 

$

(547

)

$

(2,843

)

$

6,377

 

$

4,618

 

(Loss) gain on financial instruments, net

 

Net gain on interest rate swaps

 

516

 

 

516

 

 

(Loss) gain on financial instruments, net

 

Net gain on coffee futures

 

 

829

 

 

7,005

 

Cost of sales

 

Total

 

$

(31

)

$

(2,014

)

$

6,893

 

$

11,623

 

 

 

 

11.        Fair Value Measurements

 

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

 

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

 

Level 2 — Inputs other than quoted prices that are observable, either directly or indirectly, which include quoted prices for similar assets or liabilities in active markets and quoted prices for identical assets or liabilities in markets that are not active.

 

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

 

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The following table summarizes the fair values and the levels used in fair value measurements as of June 27, 2015 for the Company’s financial assets (liabilities) (in thousands):

 

 

 

Fair Value Measurements Using

 

 

 

Level 1

 

Level 2

 

Level 3

 

Derivatives:

 

 

 

 

 

 

 

Interest rate swaps

 

$

 

$

(1,267

)

$

 

Cross currency swap

 

 

7,896

 

 

Foreign currency forward contracts

 

 

(117

)

 

Total

 

$

 

$

6,512

 

$

 

 

The following table summarizes the fair values and the levels used in fair value measurements as of September 27, 2014 for the Company’s financial liabilities (in thousands):

 

 

 

Fair Value Measurements Using

 

 

 

Level 1

 

Level 2

 

Level 3

 

Derivatives:

 

 

 

 

 

 

 

Interest rate swaps

 

$

 

$

(3,371

)

$

 

Cross currency swap

 

 

5,951

 

 

Coffee futures

 

 

3,437

 

 

Forward currency forward contracts

 

 

108

 

 

Total

 

$

 

$

6,125

 

$

 

 

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 June 27, 2015, 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 $295.5 million and $160.0 million as of June 27, 2015 and September 27, 2014, respectively.  The inputs to the calculation of the fair value of long-term debt are considered to be Level 2 within the fair value hierarchy, as the measurement of fair value is based on the net present value of calculated interest and principal payments, using an interest rate derived from a fair market yield curve adjusted for the Company’s credit rating.  The carrying value of long-term debt approximates fair value as the interest rate on the debt is based on variable interest rates that reset every 30 days.

 

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Long-Term Investment

 

The Company had a long-term investment in Bevyz of approximately $35.9 million included in other long-term assets in the accompanying Unaudited Consolidated Balance Sheet as of September 27, 2014, that was not publicly traded.  This investment was carried at cost and reviewed quarterly for indicators of other-than-temporary impairment.  During the first quarter of fiscal 2015, the Company acquired the remaining equity interests of Bevyz.  See Note 5, Acquisition.

 

12.        Income Taxes

 

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

 

As of June 27, 2015, the Company had a $17.7 million state capital loss carryforward and a state net operating loss carryforward 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 the Company’s earnings history and future plans, the Company concluded it is more likely than not that the state net operating loss carryforward will be utilized prior to expiration; however the Company concluded that it is more likely than not that the state capital loss carryforward will not be utilized prior to expiration.  In addition, the Company has a foreign net operating loss carryforward of €30.3 million available to be utilized against future taxable income with no expiration date.  Based upon the Company’s earnings history and future plans, the Company concluded it is more likely than not that the foreign net operating loss will not be utilized.  As such, a valuation allowance has been recognized against the balance of the state capital loss and foreign net operating loss carryforwards.

 

In addition, the Company’s income tax returns are periodically audited by domestic and foreign tax authorities.  These audits typically review our tax filing positions, the timing and amount of deductions taken, and the allocation of income between tax jurisdictions.  The Company evaluates exposures associated with its various tax filing positions and recognizes a tax benefit only where it is more likely than not that the tax position will be sustained upon examination by the relevant taxing authorities, including resolutions of any related appeals or litigation processes, based on the technical merits of our position.  For uncertain tax positions that do not meet this threshold, the Company records a related liability.

 

The total amount of unrecognized tax benefits as of June 27, 2015 and September 27, 2014 was $17.8 million and $14.8 million, respectively.  The amount of unrecognized tax benefits at June 27, 2015 that would impact the effective tax rate if resolved in favor of the Company is $7.7 million.  As a result of acquisitions, the Company is indemnified for $6.3 million of the total reserve balance, with a total indemnification pool of $24.5 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 indemnification provisions of the acquisition agreements have various expiration dates through December 2017.

 

As of June 27, 2015 and September 27, 2014, accrued interest and penalties of $3.7 million and $2.4 million, respectively, were included in the Consolidated Balance Sheets related to unrecognized tax benefits.  The Company recognizes interest and penalties in income tax expense.  The Company released $5.5 million of unrecognized tax benefits in the current quarter of fiscal 2015 and expects to release $1.6 million over the next twelve months due to the expiration of the statute of limitations.  In addition, the Company added $8.8 million of unrecognized tax benefits in the current quarter.

 

The Company is currently under audit by the Internal Revenue Service and Canada Revenue Agency for the 2012 and 2013 fiscal years.  The Company is generally not subject to examination with respect to returns filed for fiscal years prior to 2011.

 

The Company’s income tax expense, deferred tax assets and liabilities, and liabilities for unrecognized tax benefits reflect management’s best assessment of estimated current and future taxes to be paid.  Deferred tax asset valuation allowances and the Company’s liabilities for unrecognized tax benefits require significant management judgment regarding applicable statutes and their related interpretation, the status of various income tax audits, and the Company’s particular facts and circumstances.  Although the Company believes that the judgments and estimates discussed herein are reasonable, actual results could differ, and the Company may be exposed to losses or gains that could be material.  To the extent the Company prevails in matters for which a liability has been established, or is required to pay amounts in excess of our established liability, the Company’s effective income tax rate in a given financial statement period could be materially affected.

 

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13.        Stockholders’ Equity

 

Stock Repurchase Program

 

On July 31, 2015, Keurig’s Board of Directors authorized the repurchase of up to an additional $1.0 billion of the Company’s outstanding common stock over the next two years, at such times and prices as determined by the Company’s management (the “July 2015 repurchase authorization”). At various times beginning in fiscal 2012, and including the July 2015 repurchase authorization, the Board has authorized the Company to repurchase a total of $3.5 billion of the Company’s common stock (the “repurchase program”).  Under the repurchase program, the Company may purchase shares in the open market (including pursuant to pre-arranged stock trading plans in accordance with the guidelines specified in Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) or in privately negotiated transactions.

 

Under its repurchase program, on February 28, 2014, the Company entered into an accelerated share repurchase (“ASR”) agreement with a major financial institution (“Bank”).  The ASR allowed the Company to buy a large number of shares immediately at a purchase price determined by an average market price over a period of time.  Under the ASR, the Company agreed to purchase $700.0 million of its common stock, in total, with an initial delivery to the Company of 4,340,508 shares of the Company’s common stock by the Bank.  In the second quarter of fiscal 2015, the purchase period for the ASR ended and an additional 1,489,476 shares were delivered to the Company.  In total, 5,829,984 shares were repurchased under the ASR at an average repurchase price of $120.07 per share.  The shares were retired in the quarters they were delivered, and the up-front payment of $700.0 million was accounted for as a reduction to stockholders’ equity in the Company’s Consolidated Balance Sheet in the second quarter of fiscal 2014.

 

On March 3, 2015, the Company, under its repurchase program, completed the repurchase of 5,231,991 shares of common stock from Luigi Lavazza S.p.A. (“Lavazza”) for an aggregate purchase price of $623.6 million.  The price per share was $119.18, which represented a 3.0% discount off the closing price of the Company’s common stock on February 20, 2015, which was the business day immediately preceding the entry into the stock repurchase agreement between the Company and Lavazza.

 

As of June 27, 2015, before the July 2015 repurchase authorization, the Company had $264.5 million remaining under the repurchase program.