Keurig Green Mountain, Inc.
KEURIG GREEN MOUNTAIN, INC. (Form: 10-Q, Received: 02/01/2016 08:03:45)

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 26, 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 January 28, 2016, 149,493,728 shares of common stock of the registrant were outstanding.

 

 

 



Table of Contents

 

KEURIG GREEN MOUNTAIN, INC.

Form 10-Q

For the Thirteen Weeks Ended December 26, 2015

 

Table of Contents

 

 

 

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

30

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

52

Item 6.

Exhibits

52

Signatures

 

54

 



Table of Contents

 

Part I.  Financial Information

Item 1.  Financial Statements

 

KEURIG GREEN MOUNTAIN, INC.

Unaudited Consolidated Balance Sheets

(Dollars in thousands, except per share data)

 

 

 

December 26,
2015

 

September 26,
2015

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

214,909

 

$

59,334

 

Restricted cash and cash equivalents

 

25,561

 

30,460

 

Receivables, less uncollectible accounts and return allowances of $53,247 and $35,459 at December 26, 2015 and September 26, 2015, respectively

 

572,185

 

517,936

 

Inventories

 

517,745

 

691,980

 

Income taxes receivable

 

8,869

 

51,786

 

Other current assets

 

102,265

 

95,526

 

Deferred income taxes, net

 

70,390

 

70,181

 

Total current assets

 

1,511,924

 

1,517,203

 

 

 

 

 

 

 

Fixed assets, net

 

1,264,509

 

1,293,563

 

Intangibles, net

 

401,235

 

423,887

 

Goodwill

 

734,991

 

747,406

 

Deferred income taxes, net

 

831

 

854

 

Long-term restricted cash

 

266

 

278

 

Other long-term assets

 

17,697

 

18,386

 

 

 

 

 

 

 

Total assets

 

$

3,931,453

 

$

4,001,577

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Current portion of long-term debt

 

$

270

 

$

279

 

Current portion of capital lease and financing obligations

 

3,010

 

3,271

 

Accounts payable

 

266,912

 

298,609

 

Accrued expenses

 

231,584

 

226,519

 

Income tax payable

 

413

 

1,085

 

Dividend payable

 

48,486

 

44,048

 

Deferred income taxes, net

 

332

 

264

 

Other current liabilities

 

28,463

 

28,049

 

Total current liabilities

 

579,470

 

602,124

 

 

 

 

 

 

 

Long-term debt, less current portion

 

480,740

 

330,766

 

Capital lease and financing obligations, less current portion

 

116,505

 

117,187

 

Deferred income taxes, net

 

192,133

 

195,063

 

Other long-term liabilities

 

42,944

 

42,525

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Redeemable noncontrolling interests

 

 

4,554

 

 

 

 

 

 

 

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 - 149,187,975 and 153,209,256 shares at December 26, 2015 and September 25, 2015, respectively

 

14,919

 

15,321

 

Additional paid-in capital

 

660,077

 

879,060

 

Retained earnings

 

2,070,319

 

2,014,279

 

Accumulated other comprehensive loss

 

(225,654

)

(199,302

)

Total stockholders’ equity

 

2,519,661

 

2,709,358

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

3,931,453

 

$

4,001,577

 

 

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

 

1



Table of Contents

 

KEURIG GREEN MOUNTAIN, INC.

Unaudited Consolidated Statements of Operations

(Dollars in thousands, except per share data)

 

 

 

Thirteen weeks ended

 

 

 

December 26,
2015

 

December 27,
2014

 

Net sales

 

$

1,258,421

 

$

1,386,358

 

Cost of sales

 

898,424

 

922,236

 

Gross profit

 

359,997

 

464,122

 

 

 

 

 

 

 

Selling and operating expenses

 

137,573

 

176,522

 

General and administrative expenses

 

60,930

 

71,673

 

Restructuring expenses

 

681

 

 

Operating income

 

160,813

 

215,927

 

 

 

 

 

 

 

Other (expense) income, net

 

(223

)

181

 

Gain on financial instruments, net

 

1,395

 

3,345

 

Loss on foreign currency, net

 

(809

)

(9,071

)

Interest expense

 

(2,244

)

(1,087

)

Income before income taxes

 

158,932

 

209,295

 

 

 

 

 

 

 

Income tax expense

 

(54,435

)

(74,616

)

Net income

 

$

104,497

 

$

134,679

 

 

 

 

 

 

 

Net income attributable to noncontrolling interests

 

 

100

 

 

 

 

 

 

 

Net income attributable to Keurig

 

$

104,497

 

$

134,579

 

 

 

 

 

 

 

Net income attributable to Keurig per common share:

 

 

 

 

 

Basic

 

$

0.70

 

$

0.83

 

Diluted

 

$

0.69

 

$

0.82

 

 

 

 

 

 

 

Cash dividends declared per common share

 

$

0.325

 

$

0.2875

 

 

 

 

 

 

 

Weighted-average common shares outstanding:

 

 

 

 

 

Basic

 

150,236,842

 

162,181,332

 

Diluted

 

150,959,148

 

164,075,038

 

 

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

 

KEURIG GREEN MOUNTAIN, INC.

Unaudited Consolidated Statements of Comprehensive Income

(Dollars in thousands)

 

 

 

Thirteen weeks ended

 

Thirteen weeks ended

 

 

 

December 26, 2015

 

December 27, 2014

 

 

 

Pre-tax

 

Tax
(expense)
benefit

 

After-tax

 

Pre-tax

 

Tax
(expense)
benefit

 

After-tax

 

Net income

 

 

 

 

 

$

104,497

 

 

 

 

 

$

134,679

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains (losses) arising during the period

 

$

599

 

$

(160

)

$

439

 

$

(406

)

$

174

 

$

(232

)

Gains reclassified to net income

 

(861

)

303

 

(558

)

(565

)

236

 

(329

)

Foreign currency translation adjustments

 

(26,166

)

 

(26,166

)

(30,299

)

 

(30,299

)

Other comprehensive loss

 

$

(26,428

)

$

143

 

$

(26,285

)

$

(31,270

)

$

410

 

$

(30,860

)

Total comprehensive income

 

 

 

 

 

78,212

 

 

 

 

 

103,819

 

Total comprehensive income (loss) attributable to noncontrolling interests

 

 

 

 

 

58

 

 

 

 

 

(404

)

Total comprehensive income attributable to Keurig

 

 

 

 

 

$

78,154

 

 

 

 

 

$

104,223

 

 

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

 

KEURIG GREEN MOUNTAIN, INC.

Unaudited Consolidated Statement of Changes in Stockholders’ Equity

For the Thirteen Weeks Ended December 26, 2015

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

other

 

 

 

 

 

Common stock

 

Additional paid-

 

Retained

 

comprehensive

 

Stockholders’

 

 

 

Shares

 

Amount

 

in capital

 

earnings

 

loss

 

equity

 

Balance at September 26, 2015

 

153,209,256

 

$

15,321

 

$

879,060

 

$

2,014,279

 

$

(199,302

)

$

2,709,358

 

Options exercised

 

175,224

 

18

 

5,370

 

 

 

5,388

 

Restricted stock awards and units

 

167,681

 

16

 

(16

)

 

 

 

Repurchase of common stock

 

(4,364,186

)

(436

)

(234,599

)

 

 

(235,035

)

Stock compensation expense

 

 

 

9,295

 

 

 

9,295

 

Tax benefit from equity-based compensation plans

 

 

 

881

 

 

 

881

 

Deferred compensation expense

 

 

 

86

 

 

 

86

 

Other comprehensive loss, net of tax

 

 

 

 

 

(26,352

)

(26,352

)

Net income attributable to Keurig

 

 

 

 

104,497

 

 

104,497

 

Cash dividends declared

 

 

 

 

(48,457

)

 

(48,457

)

Balance at December 26, 2015

 

149,187,975

 

$

14,919

 

$

660,077

 

$

2,070,319

 

$

(225,654

)

$

2,519,661

 

 

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

 

KEURIG GREEN MOUNTAIN, INC.

Unaudited Consolidated Statements of Cash Flows

(Dollars in thousands)

 

 

 

Thirteen

 

Thirteen

 

 

 

weeks ended

 

weeks ended

 

 

 

December 26,
2015

 

December 27,
2014

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

104,497

 

$

134,679

 

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

 

 

 

 

 

Depreciation and amortization of fixed assets

 

60,609

 

51,049

 

Amortization of intangibles

 

12,108

 

10,110

 

Amortization of deferred financing fees

 

368

 

1,413

 

Loss on impairment of fixed assets

 

8,332

 

 

Unrealized (gain) loss on foreign currency, net

 

(3,558

)

8,981

 

Provision for doubtful accounts

 

1,019

 

2,479

 

Provision for sales returns

 

40,829

 

42,856

 

Gain on derivatives, net

 

(1,935

)

(3,462

)

Excess tax benefits from equity-based compensation plans

 

(881

)

(12,324

)

Deferred income taxes

 

(416

)

3

 

Deferred compensation and stock compensation

 

9,381

 

10,407

 

Other

 

871

 

834

 

Changes in assets and liabilities, net of acquisition:

 

 

 

 

 

Receivables

 

(97,813

)

(69,245

)

Inventories

 

172,456

 

51,001

 

Income tax receivable/payable, net

 

43,096

 

(84,205

)

Other current assets

 

(5,391

)

(3,654

)

Other long-term assets, net

 

194

 

1,297

 

Accounts payable and accrued expenses

 

(10,875

)

(3,912

)

Other current liabilities

 

934

 

(24,498

)

Other long-term liabilities

 

505

 

28,599

 

Net cash provided by operating activities

 

334,330

 

142,408

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Change in restricted cash

 

4,296

 

(158

)

Acquisition, net of cash acquired

 

 

(180,698

)

Capital expenditures for fixed assets

 

(57,911

)

(100,303

)

Other investing activities

 

192

 

(1,273

)

Net cash used in investing activities

 

(53,423

)

(282,432

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Net change in revolving line of credit

 

150,000

 

 

Proceeds from issuance of common stock under compensation plans

 

5,388

 

3,170

 

Repurchase of common stock

 

(235,035

)

(80,898

)

Purchase of noncontrolling interest

 

(4,454

)

 

Excess tax benefits from equity-based compensation plans

 

881

 

12,324

 

Payments on capital lease and financing obligations

 

(949

)

(853

)

Repayment of long-term debt

 

 

(4,690

)

Dividends paid

 

(44,019

)

(40,580

)

Other financing activities

 

 

(140

)

Net cash used in financing activities

 

(128,188

)

(111,667

)

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

2,856

 

(3,164

)

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

155,575

 

(254,855

)

Cash and cash equivalents at beginning of period

 

59,334

 

761,214

 

Cash and cash equivalents at end of period

 

$

214,909

 

$

506,359

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

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

 

$

18,203

 

$

68,292

 

Dividends declared not paid at the end of each period

 

$

48,486

 

$

46,594

 

Noncash investing and financing activities:

 

 

 

 

 

Fixed assets acquired under capital lease and financing obligations

 

$

 

$

375

 

 

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

 

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 26, 2015 balance sheet data were derived from audited financial statements, but do not include all disclosures required by GAAP.  For further information, refer to the consolidated financial statements and the footnotes included in Keurig Green Mountain Inc.’s Annual Report on Form 10-K for the fiscal year ended September 26, 2015.  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 Developments

 

On December 6, 2015, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”), by and among Acorn Holdings B.V., a private limited liability company incorporated under the laws of the Netherlands (“Acorn”), Maple Holdings Acquisition Corp., a Delaware corporation and wholly owned subsidiary of Acorn (“Acquisition Sub”), the Company and, solely for purposes of Article IX of the Merger Agreement, JAB Holdings B.V., a private limited liability company incorporated under the laws of the Netherlands (“JAB”).  Acorn is owned by an investor group led by JAB Holding Company S.à r.l (“JAB Holding”) and is the holding company of Jacobs Douwe Egberts, a global coffee and tea company.  The Merger Agreement and the consummation of the transactions contemplated by the Merger Agreement have been unanimously approved by the Company’s board of directors (the “Company Board”).

 

The Merger Agreement provides for the merger of Acquisition Sub with and into the Company, on the terms and subject to the conditions set forth in the Merger Agreement (the “Merger”), with the Company surviving the Merger as a wholly owned subsidiary of Acorn.

 

Pursuant to the Merger Agreement, at the effective time of the Merger (the “Effective Time”), each share (a “Share”) of common stock of the Company, par value $0.10 per Share (“Company Common Stock”), issued and outstanding immediately prior to the Effective Time (other than (i) Shares owned by Acorn, any subsidiary of Acorn, Acquisition Sub or the Company, in each case immediately prior to the Effective Time, and (ii) Shares held by stockholders who have not voted in favor of the Merger and who have properly and validly perfected their statutory rights of appraisal in respect of such Shares in accordance with Section 262 of the Delaware General Corporation Law) will be canceled and converted into the right to receive $92.00 in cash without interest thereon (the “Merger Consideration”), subject to applicable tax withholding.  JAB has agreed to guarantee the payment and performance obligations of Acorn and Acquisition Sub under the Merger Agreement.

 

The consummation of the Merger is subject to the satisfaction or waiver of specified closing conditions, including (i) the affirmative vote in favor of the adoption of the Merger Agreement by the holders of a majority of the outstanding Shares entitled to vote thereon, (ii) any applicable waiting periods (or extensions thereof) under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the “HSR Act”) and the Competition Act (Canada) having expired or been terminated, (iii) the absence of a Company Material Adverse Effect (as defined in the Merger Agreement) after the date of the Merger Agreement and (iv) other customary closing conditions.  The consummation of the Merger is not subject to a financing condition.

 

Additional information about the Merger Agreement is set forth in the Company’s Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission (“SEC”) on December 8, 2015.

 

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Table of Contents

 

Other than transaction expenses associated with the proposed Merger, the terms of the Merger Agreement did not impact the Company’s consolidated financial statements as of and for the thirteen weeks ended December 26, 2015.

 

3.               Recent Accounting Pronouncements

 

In November 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes (“ASU 2015-17”), which requires management to classify all deferred tax liabilities and assets by jurisdiction as non-current on the balance sheet instead of separating deferred taxes into current and non-current amounts.  The standard is effective for the Company beginning in fiscal 2018 and can be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented.  Early adoption is permitted as of the beginning of any interim or annual reporting period.  The adoption of ASU 2015-05 is not expected to have a material impact on the Company’s financial condition or financial statement disclosures.

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”).  ASU 2014-09 supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition, and most industry-specific guidance.  The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  The new standard will require the Company to separate performance obligations within a contract, determine total transaction costs, and ultimately allocate the transaction costs across the established performance obligations.  In August 2015, the FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers” (Topic 606): Deferral of the Effective Date, which delays the effective date of ASU 2014-09 by one year.  As a result, ASU 2014-09 will become effective for the Company beginning in fiscal 2019 under either full or modified retrospective adoption, with early adoption permitted as of the original effective date of ASU 2014-09.  The Company is currently assessing the potential effects of these changes on the Company’s net income, financial position, cash flows and disclosures.

 

In April 2015, the 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.  In August 2015, the FASB issued ASU No. 2015-15 - Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements (“ASU 2015-15”), which incorporates the SEC staff’s announcement that clarifies the exclusion of line-of-credit arrangements from the scope of ASU 2015-03.  The ASU clarifies that debt issuance costs related to line-of-credit arrangements can continue to be deferred and presented as an asset that is subsequently amortized over the time of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement.  ASU 2015-03 is effective retrospectively for interim and annual periods beginning after December 15, 2015.  The Company expects to adopt ASU 2015-03 effective for its fiscal second quarter ending March 26, 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 July 2015, the FASB issued ASU No. 2015-11 - Simplifying the Measurement of Inventory (“ASU 2015-11”)  that changes the measurement principle for inventory from the lower of cost or market to the lower of cost or net realizable value.  The amendments in this guidance do not apply to inventory that is measured using last-in, first-out or the retail inventory method; rather, the amendments apply to all other inventory, which includes inventory that is measured using first-in, first-out or average cost.  Within the scope of this new guidance, an entity should measure inventory at the lower of cost or net realizable value.  Net realizable value is defined as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation, which is consistent with existing GAAP.  ASU 2015-11 is effective for interim and annual periods beginning after December 15, 2016, with early adoption permitted.  The Company expects to adopt ASU 2015-11 beginning in its third quarter of fiscal 2016.  The adoption of ASU 2015-11 is not expected to have a material impact on the Company’s net income, financial position, cash flows or 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.  The adoption of ASU 2015-05 is not expected to have a material impact on the Company’s net income, financial position, cash flows or disclosures.

 

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In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern , which requires management to assess whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the financial statements are issued.  If substantial doubt exists, additional disclosures are required.  ASU 2014-15 will be effective for the Company in the fourth quarter of 2017.  The adoption of ASU 2014-15 is not expected to have a material impact on the Company’s disclosures.

 

4.               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 Keurig ®  hot and KOLD system appliances and accessories, and sources, produces and sells coffee, hot cocoa, teas and other beverages, including our Keurig ®  KOLD  beverages, in pods, including K-Cup ® , Vue ® , K-Mug , and K-Carafe  pods 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 Keurig ®  hot and KOLD system appliances and accessories, and sources, produces and sells coffee, teas and other beverages, including our Keurig ®  KOLD  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, office coffee distributors, and, 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 within the operating segment as part of the financial consolidation process.  Operating income represents gross profit less selling, operating, general and administrative, and restructuring 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, legal expenses, and other professional fees.

 

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The following tables summarize selected financial data for segment disclosures for the thirteen weeks ended December 26, 2015 and December 27, 2014, respectively:

 

 

 

Thirteen weeks ended December 26, 2015

 

 

 

(Dollars in thousands)

 

 

 

Domestic

 

Canada

 

Corporate-
Unallocated

 

Consolidated

 

Net sales

 

$

1,127,267

 

$

131,154

 

$

 

$

1,258,421

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

$

175,308

 

$

17,673

 

$

(32,168

)

$

160,813

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

$

56,531

 

$

11,756

 

$

4,430

 

$

72,717

 

 

 

 

 

 

 

 

 

 

 

Stock compensation

 

$

4,265

 

$

665

 

$

4,365

 

$

9,295

 

 

 

 

Thirteen weeks ended December 27, 2014

 

 

 

(Dollars in thousands)

 

 

 

Domestic

 

Canada

 

Corporate- Unallocated

 

Consolidated

 

Net sales

 

$

1,215,458

 

$

170,900

 

$

 

$

1,386,358

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

$

236,601

 

$

21,588

 

$

(42,262

)

$

215,927

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

$

44,586

 

$

13,859

 

$

2,714

 

$

61,159

 

 

 

 

 

 

 

 

 

 

 

Stock Compensation

 

$

5,831

 

$

723

 

$

3,837

 

$

10,391

 

 

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 26,
2015

 

December 27,
2014

 

Operating income

 

$

160,813

 

$

215,927

 

Other (expense) income, net

 

(223

)

181

 

Gain on financial instruments, net

 

1,395

 

3,345

 

Loss on foreign currency, net

 

(809

)

(9,071

)

Interest expense

 

(2,244

)

(1,087

)

Income before income taxes

 

$

158,932

 

$

209,295

 

 

5                  Restructuring Programs

 

On July 31, 2015, the Company’s Board of Directors approved a multi-year productivity program intended to reduce structural costs and streamline organizational structures to drive efficiency.  Over the first two quarters of the program, the Company has reduced its workforce by approximately 330 employees, or 5%.  Implementation of the productivity program is expected to result in cumulative pre-tax restructuring charges of approximately $18.5 million, primarily including costs associated with employee terminations and other business transition costs and accelerated depreciation on assets as a result of a business exit plan.  Cumulative pretax restructuring charges of $15.9 million have been recorded through December 26, 2015, the second fiscal quarter of the program, of which approximately $11.9 million represented employee severance related costs that will be settled in cash.

 

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The following represents cumulative estimated pre-tax restructuring charges, by segment, to be incurred for the implementation of the productivity program (in thousands):

 

 

 

Cumulative Expenses
Incurred-to-date

 

Remaining Estimated
Expenses

 

Cumulative Estimated
Expenses

 

Domestic

 

$

12,533

 

$

 

$

12,533

 

Canada

 

2,609

 

2,573

 

$

5,182

 

Corporate - Unallocated

 

789

 

 

$

789

 

Total

 

$

15,931

 

$

2,573

 

$

18,504

 

 

During the thirteen weeks ended December 26, 2015, the Company recorded restructuring expenses for the multi-year productivity program under the caption Restructuring expenses, within operating income in the accompanying Unaudited Consolidated Statements of Operations as follows (in thousands):

 

 

 

Severance and
Related Costs

 

Asset Write-
downs

 

Other Exit
Activities

 

Total

 

Domestic

 

$

297

 

$

240

 

$

 

$

537

 

Canada

 

 

96

 

 

96

 

Corporate Unallocated

 

48

 

 

 

48

 

Total restructuring expenses

 

$

345

 

$

336

 

$

 

$

681

 

 

The activity for the restructuring liability associated with the multi-year productivity program was as follows (in thousands):

 

 

 

Severance and
Related Costs

 

Asset Write-downs

 

Other Exit Activities

 

Total

 

Liability balance, September 26, 2015

 

$

8,533

 

$

 

$

341

 

$

8,874

 

Charges

 

345

 

336

 

 

681

 

Cash spent

 

(4,463

)

 

(341

)

(4,804

)

Non-cash settlements / adjustments

 

 

(336

)

 

(336

)

Foreign currency adjustments

 

(44

)

 

 

(44

)

Liability balance, December 26, 2015

 

$

4,371

 

$

 

$

 

$

4,371

 

 

The Company spent $4.5 million during the thirteen weeks ended December 26, 2015 in cash severance and related costs.  The Company also recognized non-cash asset write-downs (including accelerated depreciation) and other non-cash adjustments totaling $0.3 million during the thirteen weeks ended December 26, 2015.  The Company’s accrued restructuring liability is included in the caption, Accrued expenses , in the accompanying Unaudited Consolidated Balance Sheets.

 

6.               Inventories

 

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

 

 

 

December 26,
2015

 

September 26,
2015

 

Raw materials and supplies

 

$

184,767

 

$

227,529

 

Finished goods

 

332,978

 

464,451

 

 

 

$

517,745

 

$

691,980

 

 

At December 26, 2015, the Company had approximately $224.6 million in green coffee purchase commitments, of which approximately 88% 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 $1.26 per pound at December 26, 2015.  In addition to its green coffee commitments, the Company had approximately $263.5 million in fixed price brewer and related accessory purchase commitments and $864.9 million in production raw material commitments at December 26, 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 December 26, 2015, minimum future inventory purchase commitments were as follows (in thousands):

 

Fiscal Year

 

Inventory
Purchase
Obligations(1)

 

Remainder of 2016

 

$

430,879

 

2017

 

488,409

 

2018

 

258,140

 

2019

 

109,805

 

2020

 

65,762

 

Thereafter

 

 

 

 

$

1,352,995

 

 


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

 

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7.               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 fiscal 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 and the Company has concluded there were no measurement period adjustments to record.  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.  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 weighted-average amortization periods for defensive intangible assets, non-compete agreements, and contractual agreements are 13 years, 3 years, and 15 years, respectively.

 

The following summarizes the final 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 fourth quarter of fiscal 2014.  Approximately $24.5 million of the purchase price was held in escrow at December 26, 2015 and is included under the captions Restricted cash and cash equivalents and Other current liabilities in the accompanying unaudited Consolidated Balance Sheet.  The revenue and earnings of Bevyz since acquisition and the pro forma financial statements are immaterial.  For information on the assignment of goodwill to our operating segments, see Note 9, Goodwill and Intangible Assets .

 

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Table of Contents

 

8.               Fixed Assets

 

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

 

 

 

Useful Life in Years

 

December 26,
2015

 

September 26,
2015

 

Production equipment

 

1-15

 

$

894,833

 

$

856,235

 

Coffee service equipment

 

3-7

 

42,402

 

51,261

 

Computer equipment and software

 

1-6

 

257,745

 

257,075

 

Land

 

Indefinite

 

13,999

 

14,124

 

Building and building improvements

 

4-30

 

352,679

 

341,514

 

Furniture and fixtures

 

1-15

 

34,994

 

36,254

 

Vehicles

 

4-25

 

28,823

 

11,847

 

Leasehold improvements

 

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

 

123,230

 

121,933

 

Assets acquired under capital leases

 

5-15

 

41,987

 

42,003

 

Construction-in-progress

 

 

 

232,987

 

276,743

 

Total fixed assets

 

 

 

$

2,023,679

 

$

2,008,989

 

Accumulated depreciation and amortization

 

 

 

(759,170

)

(715,426

)

 

 

 

 

$

1,264,509

 

$

1,293,563

 

 

Assets acquired under capital leases, net of accumulated amortization, were $31.3 million and $32.0 million at December 26, 2015 and September 26, 2015, respectively.

 

Total depreciation and amortization expense relating to all fixed assets was $60.6 million and $51.0 million for the thirteen weeks ended December 26, 2015 and December 27, 2014, respectively.

 

In September 2015, the Company decided to discontinue sales of the Keurig ®  BOLT ®  brewer and accordingly revised its forecasted unit sales for fiscal year 2016 and beyond and recorded an impairment loss in the fourth quarter.  At the time there were certain assets which the Company planned to repurpose, however upon further review these assets will not be utilized.  Therefore, the Company recorded an impairment loss of $8.3 million in the first quarter of fiscal 2016, which was included in Cost of sales in the accompanying unaudited Consolidated Statements of Operations.  These impairment losses were recorded in the Domestic segment.  The fair value of the Keurig ®  BOLT ® asset group was determined based upon the discounted cash flow method.

 

9.               Goodwill and Intangible Assets

 

The following represented the change in the carrying amount of goodwill by segment for the thirteen weeks ended December 26, 2015 (in thousands):

 

 

 

Domestic(1)

 

Canada

 

Total

 

Balance at September 26, 2015

 

$

423,958

 

$

323,448

 

$

747,406

 

Foreign currency effect

 

(1,073

)

(11,342

)

(12,415

)

Balance at December 26, 2015

 

$

422,885

 

$

312,106

 

$

734,991

 

 


(1)          See Note 7, Acquisition for discussion of Goodwill recognized in connection with the Bevyz acquisition.

 

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

 

 

 

December 26, 2015

 

September 26, 2015

 

Trade names

 

$

72,877

 

$

75,525

 

 

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:

 

 

 

 

 

December 26, 2015

 

September 26, 2015

 

 

 

Useful Life in
Years

 

Gross Carrying
Amount

 

Accumulated
Amortization

 

Gross Carrying
Amount

 

Accumulated
Amortization

 

Acquired technology

 

4-15

 

$

17,855

 

$

(15,797

)

$

17,891

 

$

(15,378

)

Defensive intangible assets(2)

 

13

 

143,889

 

(11,281

)

146,772

 

(8,685

)

Customer and roaster agreements

 

10-11

 

7,887

 

(5,771

)

8,047

 

(5,670

)

Customer relationships

 

2-16

 

333,396

 

(158,738

)

342,113

 

(155,047

)

Trade names

 

5-11

 

32,859

 

(18,157

)

33,315

 

(17,541

)

Non-compete agreements

 

3-5

 

3,352

 

(1,136

)

3,419

 

(874

)

Total

 

 

 

$

539,238

 

$

(210,880

)

$

551,557

 

$

(203,195

)

 


(2)          See Note 7, Acquisition for discussion of defensive intangible assets acquired in connection with the Bevyz acquisition.

 

Definite-lived intangible assets are amortized on a straight-line basis over the period of expected economic benefit.  Total amortization expense was $12.1 million and $10.1 million for the thirteen weeks ended December 26, 2015 and December 27, 2014, respectively.

 

The estimated aggregate amortization expense for the remainder of fiscal 2016, for each of the next five years and thereafter, is as follows (in thousands):

 

Fiscal Year

 

Amortization Expense

 

Remainder of 2016

 

$

35,125

 

2017

 

46,076

 

2018

 

44,743

 

2019

 

44,400

 

2020

 

39,631

 

2021

 

30,964

 

Thereafter

 

87,419

 

 

10.        Product Warranties

 

The Company offers a one-year warranty on all Keurig ®  hot and Keurig ®  KOLD beverage systems.  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 weeks ended December 26, 2015 and December 27, 2014 are as follows (in thousands):

 

 

 

Thirteen weeks ended

 

 

 

December 26,
2015

 

December 27,
2014

 

Balance, beginning of period

 

$

15,162

 

$

12,850

 

Provision related to current period

 

17,969

 

14,166

 

Usage

 

(8,423

)

(7,336

)

Balance, end of period

 

$

24,708

 

$

19,680

 

 

For the thirteen weeks ended December 26, 2015 and December 27, 2014, the Company recorded recoveries of $0.3 million and $0.2 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.

 

11.        Noncontrolling Interests

 

Noncontrolling interests (“NCI”) are evaluated by the Company and are shown as either a liability, mezzanine 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.

 

On June 22, 2012, the Company executed a Share Purchase and Sale Agreement under which the Company agreed to purchase a noncontrolling interest holder’s shares in Pause Cafe Estrie Inc., an entity in which the Company had a controlling interest subsequent to the Company’s third quarter of fiscal year 2015.  The redeemable NCI was classified outside of stockholders’ equity in the Unaudited Consolidated Balance Sheets as mezzanine equity under the caption, Redeemable noncontrolling interests, and was measured at the greater of 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 and its historical value with any change from the prior period recognized in equity.  On September 27, 2015, the Company purchased the remaining noncontrolling interest holder’s shares in Pause Cafe Estrie Inc. for approximately $4.6 million, resulting in the subsidiary being wholly-owned by the Company.

 

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.

 

The changes in the temporary equity attributable to the redeemable NCI for the thirteen weeks ended December 26, 2015 are as follows (in thousands):

 

 

 

Equity attributable
to redeemable
noncontrolling interest

 

Balance at September 26, 2015

 

$

4,554

 

Net income

 

 

Adjustment to redemption value

 

 

Cash distributions

 

 

Other comprehensive income

 

58

 

Purchase of noncontrolling interest

 

(4,612

)

Balance at December 26, 2015

 

$

 

 

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Table of Contents

 

12. Long-Term Debt

 

On June 29, 2015, the Company entered into a new Credit Agreement, by and among the Company and Keurig Trading Sàrl, a wholly-owned subsidiary of the Company, as borrowers, Bank of America, N.A., as administrative agent, and the other lenders named therein (the “Credit Agreement”) that provides for a $1,800,000,000 unsecured revolving credit facility (the “New Revolving Facility”) comprised of a $1,300,000,000 U.S. revolving credit facility under which the Company may obtain extensions of credit, subject to the satisfaction of customary conditions, in U.S. Dollars (the “U.S. Revolver”) and a $500,000,000 alternative currency facility under which the Company and Keurig Trading Sàrl, a wholly owned subsidiary of the Company, may obtain extensions of credit, subject to the satisfaction of customary conditions, in U.S. Dollars or in Canadian Dollars, Euros, Pounds Sterling, Yen, Swiss Franc and any other currency that is approved by the administrative agent and appropriate lenders or U.S. letter of credit issuer pursuant to the terms of the Credit Agreement (the “Alternative Currency Revolver”).  The New Revolving Facility includes a $200,000,000 subfacility for the issuance of letters of credit, and a $50,000,000 sublimit for swing line loans restricted to borrowings in U.S. Dollars only.

 

The Credit Agreement permits the Company to request increases to the New Revolving Facility, and/or the establishment of one or more new term loan commitments, in an aggregate amount not to exceed $750,000,000 (the “Incremental Credit Facility”).  The lenders under the New Revolving Facility will not be under any obligation to provide any such increases or new term loan commitments, and the availability of such additional increases and/or establishment of new term loan commitments is subject to customary terms and conditions.

 

Long-term debt outstanding consists of the following (in thousands):

 

 

 

December 26, 2015

 

September 26, 2015

 

U.S. Revolver

 

$

480,000

 

$

330,000

 

Other

 

1,010

 

1,045

 

Total long-term debt

 

481,010

 

331,045

 

Less current portion

 

270

 

279

 

Long-term portion

 

$

480,740

 

$

330,766

 

 

Interest rates per year on the New Revolving Facility at the option of the Company, are (i) LIBOR plus an applicable margin based on the Company’s leverage ratio, or (ii) the Alternate Base Rate (defined as the highest of the Bank of America prime rate, the Federal Funds rate plus 0.50%, and one-month LIBOR plus 1.00%) plus an applicable margin based on the Company’s leverage ratio.  Under the New Revolving Facility, initially, the applicable margin for base rate loans and eurocurrency rate loans is a percentage per annum equal to 0.125% and 1.125%, respectively, and U.S. letter of credit fees will be a percentage per annum equal to 1.125%.  Beginning with the delivery date of financial statements for the fiscal year ending September 26, 2015, the applicable margin with respect to the U.S. Revolver and the Alternative Currency Revolver and the U.S. letter of credit fees will be subject to adjustments based upon the Company’s consolidated leverage ratio ranging from, in the case of the applicable margin with respect to base rate loans, 0.125% to 0.75%, in the case of the applicable margin with respect to eurocurrency rate loans, 1.125% to 1.75%, and in the case of U.S. letter of credit fees, 1.125% to 1.75%.

 

Under the New Revolving Facility, the Company is required to pay a quarterly commitment fee on the unused portion of the U.S. Revolver and the Alternative Currency Revolver in the range of, based on the Company’s consolidated leverage ratio, 0.15% to 0.25% of the dollar amount of such unused portion, unless the Company elects to reduce the aggregate commitments under the U.S. Revolver and the Alternative Currency Revolver at the Company’s option without penalty or premium.

 

The Credit Agreement contains customary representations, warranties and affirmative and negative covenants.  Further, the Credit Agreement contains a financial covenant requiring that the Company must maintain a minimum consolidated interest coverage ratio of 3.00:1.00.  The Credit Agreement also contains a financial covenant requiring that the Company not exceed a maximum consolidated leverage ratio of 3.25:1.00, which maximum consolidated leverage ratio may be increased on a temporary basis to 3.50:1.00 in connection with certain material acquisitions and subject to certain conditions.  At December 26, 2015, the Company was in compliance with these covenants.

 

In connection with the Credit Agreement, approximately $4.1 million of incremental deferred financing fees were recorded on the Consolidated Balance Sheet and included in Other Long-Term Assets in the fourth quarter of fiscal 2015.  The deferred financing fees are amortized as interest expense over the life of the respective loan using a method that approximates the effective interest rate method.

 

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Our average effective interest rate on debt outstanding as of December 26, 2015 and September 26, 2015 was 1.4% and 1.3%, respectively, excluding amortization of deferred financing charges and interest on capital leases and financing obligations, and including the effect of interest rate swap agreements.

 

At December 26, 2015 and September 26, 2015, the Company had $7.0 million and $5.4 million in outstanding letters of credit under the Credit Agreement, respectively.

 

The Company did not have any interest rate swap agreements in effect as of December 26, 2015.

 

Maturities

 

Scheduled maturities of long-term debt are as follows (in thousands):

 

Fiscal Year

 

 

 

Remainder of 2016

 

$

270

 

2017

 

281

 

2018

 

295

 

2019

 

164

 

2020

 

480,000

 

Thereafter

 

 

 

 

$

481,010

 

 

13.        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.

 

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 26, 2015, the Company has approximately 1 week 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 weeks ended December 26, 2015 and December 26, 2014 was $0.1 million and $0.3 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.

 

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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.

 

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

 

 

 

December 26, 2015

 

September 26, 2015

 

Balance Sheet Classification

 

Derivatives designated as cash flow hedges:

 

 

 

 

 

 

 

Foreign currency forward contracts

 

$

774

 

$

533

 

Other current assets

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedges:

 

 

 

 

 

 

 

Cross currency swap

 

12,257

 

10,863

 

Other current assets

 

 

 

 

 

 

 

 

 

Total

 

$

13,031

 

$

11,396

 

 

 

 

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 December 26, 2015 and September 26, 2015 is as follows (in thousands):

 

 

 

Gross

 

Gross
amounts offset
in the

 

Net amount of
assets presented
in the

 

Gross amounts not offset in the
Unaudited Consolidated
Balance Sheet

 

 

 

 

 

amounts of
recognized
assets

 

Unaudited
Consolidated
Balance Sheet

 

Unaudited
Consolidated
Balance Sheet

 

Financial
instruments

 

Cash
collateral
received

 

Net amount

 

Derivative assets, as of December 26,2015

 

$

13,031

 

$

 

$

13,031

 

$

 

$

 

$

13,031

 

Derivative assets, as of September 26, 2015

 

11,396

 

 

11,396

 

 

 

11,396

 

 

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Table of Contents

 

There were no derivative liabilities, either on a gross or net basis, as of December 26, 2015 and September 26, 2015.

 

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

 

 

 

Thirteen weeks ended

 

 

 

December 26, 2015

 

December 27, 2014

 

Cash Flow Hedges:

 

 

 

 

 

Interest rate swaps

 

$

 

$

689

 

Coffee futures

 

 

(1,172

)

Foreign currency forward contracts

 

599

 

77

 

Total

 

$

599

 

$

(406

)

 

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

 

 

 

Thirteen weeks ended

 

Location of Gains

 

 

 

December 26,

 

December 27,

 

(Losses) Reclassified

 

 

 

2015

 

2014

 

from OCI into Income

 

 

 

 

 

 

 

 

 

Coffee futures

 

$

540

 

$

624

 

Cost of sales

 

Foreign currency forward contracts

 

321

 

(59

)

Cost of sales

 

Total

 

$

861

 

$

565

 

 

 

 

The Company expects to reclassify $0.0 million of net gains, after tax, from OCI to earnings for coffee derivatives within the next twelve months.

 

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

 

 

 

Thirteen weeks ended

 

Location of Net Gains (losses) in

 

 

 

December 26,
2015

 

December
27, 2014

 

Unaudited Consolidated 
Statements of Operations

 

Coffee futures

 

$

 

$

94

 

Cost of sales

 

 

See Note 16, 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):

 

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Table of Contents

 

 

 

Thirteen weeks ended

 

Location of Net Gain in

 

 

 

December 26,
2015

 

December 27,
2014

 

Unaudited Consolidated
Statements of Operations

 

Net gain on cross currency swap

 

$

1,395

 

$

3,345

 

Gain on financial instruments, net

 

Total

 

$

1,395

 

$

3,345

 

 

 

 

14.        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 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.

 

The following table summarizes the fair values and the levels used in fair value measurements as of December 26, 2015 for the Company’s financial assets (liabilities) (in thousands):

 

 

 

Fair Value Measurements Using

 

 

 

Level 1

 

Level 2

 

Level 3

 

Derivatives:

 

 

 

 

 

 

 

Cross currency swap

 

 

12,257

 

 

Foreign currency forward contracts

 

 

774

 

 

Total

 

$

 

$

13,031

 

$

 

 

The following table summarizes the fair values and the levels used in fair value measurements as of September 26, 2015 for the Company’s financial liabilities (in thousands):

 

 

 

Fair Value Measurements Using

 

 

 

Level 1

 

Level 2

 

Level 3

 

Derivatives:

 

 

 

 

 

 

 

Cross currency swap

 

 

10,863

 

 

Foreign currency forward contracts

 

 

533

 

 

Total

 

$

 

$

11,396

 

$

 

 

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 derivatives that do not qualify for hedge accounting treatment.

 

Derivative financial instruments include coffee futures contracts, a cross currency swap agreement and foreign currency forward contracts.  The Company may identify 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.

 

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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 cross currency swap agreements.  The Company’s fair value measurements include a credit valuation adjustment for the concentrations of credit risk.

 

As of December 26, 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 $481.0 million and $331.0 million as of December 26, 2015 and September 26, 2015, 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 generally reset every 30 days.

 

15.        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.

 

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.

 

As of December 26, 2015, the Company has a state net operating loss carryforward of $11.5 million available to be utilized against future taxable income for years through fiscal 2029, 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 it is more likely than not that the net operating loss carryforward will be utilized prior to its expiration.  Based upon earnings history and future plans, the Company concluded it is more likely than not that $29.8 million of foreign net operating loss carryforwards will not be utilized and a valuation allowance has been recognized.

 

As of December 26, 2015 and September 26, 2015, the total amount of unrecognized tax benefits was $32.7 million and $31.8 million, respectively.  The amount of unrecognized tax benefits at December 26, 2015 that would impact the effective tax rate if resolved in favor of the Company is $6.6 million.  As a result of prior acquisitions, the Company is indemnified for $5.0 million of the total reserve balance, with a total indemnification pool available up to $22.3 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 December 2017.

 

As of December 26, 2015 and September 26, 2015, accrued interest and penalties of $4.4 million and $4.1 million, respectively, were included in the Unaudited Consolidated Balance Sheets.  The Company recognizes interest and penalties in income tax expense.  The Company released $0.1 million of unrecognized tax benefits in the current quarter of fiscal 2016.  In addition, the Company added $1.3 million of unrecognized tax benefit in the current quarter of fiscal 2016.

 

The Company is currently under audit by the Internal Revenue Service and Canada Revenue Agency for the 2012 and 2013 fiscal years and 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. 

 

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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.

 

16.        Stockholders’ Equity

 

Stock Repurchase Program

 

On July 31, 2015, the Company Board 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 Company 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 December 26, 2015, the Company had $914.5 million remaining under the repurchase program. Pursuant to the terms of the Merger Agreement, the Company may not repurchase any of its capital, except in connection with the payment of the exercise price or withholding taxes with respect to any award granted under the Company’s stock-based compensation plans. Accordingly, the Company will not purchase any shares in connection with the repurchase program prior to the merger or earlier termination of the Merger Agreement.

 

Summary of share repurchase activity under the repurchase program:

 

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Table of Contents

 

 

 

Thirteen weeks ended

 

 

 

 

 

December 26, 2015

 

Fiscal 2015

 

Number of shares acquired on the open market

 

4,364,186

 

4,307,488

 

Average price per share of open market acquired shares

 

$

53.86

 

$

95.13

 

 

 

 

 

 

 

Number of shares acquired from Lavazza

 

 

5,231,991

 

Average price per share of Lavazza acquired shares

 

$

 

$

119.18

 

 

 

 

 

 

 

Number of shares under February 2014 ASR

 

 

1,489,476

 

Average price per share of ASR shares(1)

 

$

 

$

120.07

 

 

 

 

 

 

 

Total cost of acquired shares (in thousands)

 

$

235,035

 

$

1,033,321

 

 


(1) Average price per share for total shares repurchased under February 2014 ASR.

 

Accumulated Other Comprehensive Income (Loss)

 

The following tables provide the changes in the components of accumulated other comprehensive income (loss), net of tax (in thousands):

 

 

 

Thirteen weeks ended

 

Thirteen weeks ended

 

 

 

December 26, 2015

 

December 27, 2014

 

 

 

Cash Flow
Hedges

 

Translation

 

Accumulated
Other
Comprehensive
Income (Loss)

 

Cash Flow
Hedges

 

Translation

 

Accumulated
Other
Comprehensive
Income (Loss)

 

Balance, beginning of period

 

$

830

 

$

(200,132

)

$

(199,302

)

$

8,952

 

$

(63,003

)

$

(54,051

)

Other comprehensive gain (loss), before reclassifications

 

439

 

(26,224

)

(25,785

)

(232

)

(29,794

)

(30,026

)

Amounts reclassified from accumulated other comprehensive income (loss)

 

(558

)

 

(558

)

(329

)

 

(329

)

Foreign currency exchange impact on cash flow hedges

 

(9

)

 

(9

)

(2

)

 

(2

)

Net current period other comprehensive loss

 

(128

)

(26,224

)

(26,352

)

(563

)

(29,794

)

(30,357

)

Balance, end of period

 

$

702

 

$

(226,356

)

$

(225,654

)

$

8,389

 

$

(92,797

)

$

(84,408

)

 

The thirteen weeks ended December 26, 2015 and December 27, 2014 included unfavorable translation adjustments which were primarily due to the weakening of the Canadian dollar against the U.S. dollar.  See also Note 13, Derivative Financial Instruments .

 

Common Stock Dividends

 

During the first quarter of fiscal 2016, the Company declared a quarterly dividend of $0.325 per common share, or $48.5 million in the aggregate, payable on February 16, 2016 to stockholders of record on January 15, 2016. Pursuant to the terms of the Merger Agreement, the Company may not declare or pay any additional cash dividend or other distribution other than the regular quarterly dividend of $0.325 per share payable on February 16, 2016.

 

During the thirteen weeks ended December 26, 2015 and December 27, 2014, the Company paid dividends of approximately $44.0 million and $40.6 million, respectively.

 

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17.        Compensation Plans

 

Stock Options

 

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 26, 2015 and December 27, 2014:

 

 

 

Thirteen weeks ended

 

 

 

December 26,
2015

 

December 27,
2014

 

Average expected life

 

5.5 years

 

5.5 years

 

Average volatility

 

60

%

57

%

Dividend yield

 

2.45

%

0.83

%

Risk-free interest rate

 

1.68

%

1.62

%

Weighted average grant date fair value

 

$

23.50

 

$

67.11

 

 

Restricted Stock Units, Performance Stock Units and Other Awards

 

The Company awards Company Restricted Stock Units and PSUs to eligible employees and non-employee Directors (each, a “Grantee”) which entitle a Grantee to receive shares of the Company’s common stock.  Company Restricted Stock Units and PSUs are awards denominated in units that are settled in shares of the Company’s common stock upon vesting.  In general, employee Company Restricted Stock Units vest over a period of three or four years based on a Grantee’s continuing employment and non-employee Directors’ Company Restricted Stock Units vest immediately.  The vesting of PSUs follows a two or three year measurement period and is conditioned on both the Grantee’s service and the Company’s achievement of performance requirements during the measurement period.  In the past the Company has also granted restricted stock awards (“RSAs”) which are awards of common stock that are restricted until the shares vest (generally over a period of three or four years).  The fair value of Company Restricted Stock Units, RSAs and PSUs is based on the closing price of the Company’s common stock on the grant date.  Compensation expense for Company Restricted Stock Units 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 Amended and Restated 2006 Incentive Plan (the “2006 Plan”) and the Company’s 2014 Omnibus Incentive Plan (which replaced the 2006 Plan). In addition, the Company has awarded Deferred Cash Awards to Grantees which entitle a Grantee to receive cash over time upon vesting.  The vesting of Deferred Cash Awards is 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 26, 2015 and December 27, 2014:

 

 

 

Thirteen weeks ended

 

 

 

December 26,
2015

 

December 27,
2014

 

Average expected life

 

6 months

 

6 months

 

Average volatility

 

57

%

40

%

Dividend yield

 

2.16

%

0.88

%

Risk-free interest rate

 

0.10

%

0.05

%

Weighted average grant date fair value

 

$

16.27

 

$

33.94

 

 

Income before income taxes in the Unaudited Consolidated Statements of Operations includes compensation expense related to the plans described above of $8.9 million and $10.4 million for the thirteen weeks ended December 26, 2015 and December 27, 2014, respectively.

 

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18.        Commitments and Contingencies

 

Legal Proceedings

 

Litigation Relating to Proposed Merger

 

On December 15, 2015, a putative class action lawsuit ( Berger v. Keurig Green Mountain, Inc., et al. , Case No. 11815-CB) was filed in the Court of Chancery of the State of Delaware against the Company, the members of the Company Board, Acorn, Acquisition Sub, JAB and JAB Holding.  The complaint alleges that the members of the Company Board breached their fiduciary duties by, among other things, (i) initiating a process to sell the Company that undervalues it, (ii) capping the price of the Company at an amount that does not adequately reflect its true value, (iii) failing to sufficiently inform themselves of the Company’s value or disregarding that value and (iv) committing to the proposed transaction at the expense of any alternate potential acquirers.  The complaint also alleges that the Company, Acorn, Acquisition Sub, JAB and JAB Holding aided and abetted those alleged breaches of fiduciary duties by the members of the Company Board.  The complaint seeks, among other things, an order that the action may be maintained as a class action, certification of the plaintiff as a representative of the class and plaintiff’s counsel as class counsel, injunctive relief, rescission of the transaction or rescissory damages in favor of the plaintiff and the class, an accounting of all damages sustained by the plaintiff and the class and the fees and costs associated with the litigation.

 

From December 21, 2015 through January 19, 2016, three additional putative class action lawsuits ( Kaufmann v. Keurig Green Mountain, Inc., et al. , Case No. 11826-CB,  Restivo v. Keurig Green Mountain, Inc., et al. , Case No. 11840-CB and Chapel v. Keurig Green Mountain, Inc., et al. , Case No. 11911-CB), were filed in the Court of Chancery of the State of Delaware against the Company, the members of the Company Board, Acorn, Acquisition Sub and JAB.  The complaints allege similar claims and allegations to those in the  Berger  complaint, except that the Chapel complaint also alleges that the members of the Company Board breached their fiduciary duties by making false and misleading proxy disclosures.  The complaints seek similar relief to that sought in the Berger complaint.  On January 27, 2016, the Chapel plaintiff filed a Motion for Preliminary Injunction and Motion for Expedited Proceedings.  The court has set a hearing on the motion for expedited proceedings for February 2, 2016.

 

On January 27, 2016, a putative class action lawsuit ( Montanio v. Keurig Green Mountain, Inc. , Case No. 5:16-cv-00019-gwc) was filed in the United States District Court for the District of Vermont against the Company, the members of the Company Board, Acorn, Acquisition Sub and JAB.  The complaint alleges, among other things, (i) that the defendants violated federal securities laws by disseminating a proxy statement that was allegedly false and misleading, and which allegedly failed to disclose facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading and (ii) that our directors violated federal securities laws in exercising control over individuals alleged to have disseminated the proxy statement that was allegedly false and misleading.  The complaint seeks, among other things, an order that the action may be maintained as a class action, certification of the plaintiff as a representative of the class and plaintiff's counsel as class counsel, a declaration that the proxy was materially false and misleading and in violation of certain federal securities laws, injunctive relief, rescissory damages in favor of the plaintiff and the class, and the fees and costs associated with the litigation.  The lawsuit is in a preliminary stage.

 

The Company intends to vigorously defend all of the pending lawsuits.  At this time, the Company is unable to predict the outcome of these lawsuits, the potential 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.

 

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Prop 65 Litigation

 

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.  Acrylamide is not added to coffee, but forms in trace amounts (parts per billion) as part of a chemical reaction that occurs in the coffee bean when it is roasted.  Therefore it is present in all roasted coffee.  To date, the Company is unaware of any reliable method for reducing acrylamide levels in coffee without adversely affecting the quality of the product.  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 donut shops.  ( Council for Education and Research on Toxics v. Starbucks Corp., et al. , Case No. BC 415759).  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 ordered the case phased for discovery and trial.  Trial of the first phase of the case commenced on September 8, 2014 and was limited to three affirmative defenses shared by all defendants in both cases.  Other affirmative defenses, plaintiff’s prima facie case, and remedies were deferred for subsequent phases if defendants did not prevail on the three Phase 1 defenses.  On September 1, 2015, the trial court issued a ruling adverse to defendants on all Phase 1 defenses.  As a result, litigation of Phase 2 has commenced and discovery is underway.  The precise issues to be litigated in Phase 2 and the scope of discovery have yet to be determined.

 

At this stage of the proceedings, 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.

 

Stockholder Litigation

 

Two consolidated 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 pending putative securities fraud class actions were first filed on November 29, 2011 and June 19, 2015, respectively.  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, as amended, (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 (the “PSLRA”), 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.  Pursuant to a schedule entered by the appeals court, briefing on the appeal was completed on June 23, 2014.  The Second Circuit heard oral argument on the appeal on December 1, 2014. 

 

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On July 24, 2015, the Second Circuit issued an opinion vacating the district court’s dismissal of the amended complaint and remanding the action to the district court.  On September 29, 2015, defendants answered the complaint and on October 14, 2015, the district court approved a stipulated discovery schedule for proceedings in the remanded action.  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 consolidated putative securities fraud class action is pending in the United States District Court for the Northern District of California and consists of the following actions: Blasco v. Keurig Green Mountain, Inc. et al. , Civ. No. 3:15-cv-02766-VC; Jazlowiecki v. Keurig Green Mountain, Inc. et al. , Civ. No. 5:15-cv-03396-BLF; and Patel v. Keurig Green Mountain, Inc.  et al. , Civ. No. 3:15-cv-03715.  The underlying complaints in the actions allege violations of the federal securities laws in connection with the Company’s disclosures relating to its forward guidance, as well as the Company’s public statements concerning the anticipated timing of the launch of Keurig ®  KOLD .  The complaints include counts for violation of Section 10(b) of the Exchange Act and Rule 10b-5 against all defendants, and for violation of Section 20(a) of the Exchange Act against the officer defendants.  The plaintiffs seek to represent all purchasers of the Company’s securities between February 4, 2015 and May 6, 2015 or May 14, 2015 or, in the case of the Patel action, from November 19, 2014 through August 5, 2015.  The plaintiffs seek class certification, compensatory damages, attorneys’ fees, costs, and such other relief as the court should deem just and proper.  Pursuant to the PSLRA, 15 U.S.C. § 78u-4(a)(3), stockholders had until August 18, 2015 to move the court to serve as lead plaintiff of the putative class.  Competing applications were filed and on September 28, 2015, the court consolidated the pending actions, appointed Jessica Lee, Alan Schlussel, and Lawrence E. Wilder as lead plaintiffs, and approved their selection of Glancy, Prongay & Murray LLP and The Rosen Law Firm, P.A. as co-lead counsel.  On October 6, 2015, the court approved a stipulation filed by the parties providing for the filing of a consolidated complaint and setting a briefing schedule for defendants’ motions to dismiss.  Lead plaintiffs filed their consolidated complaint on November 6, 2015.  Defendants moved to dismiss on December 11, 2015.  Briefing on the motions to dismiss will be completed on February 12, 2016 and an oral argument is calendared for February 25, 2016.

 

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 the now dismissed Horowitz v. Green Mountain Coffee Roasters, Inc. , Civ. No. 2:10-cv-00227 securities class action complaint, the LAMPERS action described above, and the now dismissed action captioned Fifield v. Green Mountain Coffee Roasters, Inc. , Civ. No. 2:12-cv-00091, 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, after the plaintiffs in the Horowitz putative securities fraud class action dismissed their appeal with prejudice, 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.  On February 24, 2014, the court approved a further joint stipulation filed by the parties continuing the temporary stay until the appeals court rules on the pending appeal in the LAMPERS putative securities fraud class action.  The Second Circuit’s July 24, 2015 decision on the LAMPERS appeal described above lifts the temporary stay and requires the parties to confer on scheduling.

 

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. 

 

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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.  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.  On April 21, 2014, the court approved a joint stipulation filed by the parties continuing the temporary stay until the appeals court rules on the pending appeal in the LAMPERS putative securities fraud class action.  The Second Circuit’s July 24, 2015 decision on the LAMPERS appeal lifted the temporary stay and required the parties to confer on scheduling and on October 29, 2015, the court approved a stipulation filed by the parties staying the action pending further litigation in the LAMPERS putative securities fraud class action and the consolidated federal derivative 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.

 

Antitrust Litigation

 

On February 11, 2014, TreeHouse Foods, Inc., Bay Valley Foods, LLC, and Sturm Foods, Inc.  filed suit against Green Mountain Coffee Roasters, Inc.  and Keurig, Inc.  in the U.S.  District Court for the Southern District of New York ( TreeHouse Foods, Inc.  et al.  v.  Green Mountain Coffee Roasters, Inc.  et al. , No.  1:14-cv-00905-VSB).  The TreeHouse complaint asserted claims under the federal antitrust laws and various state laws, contending that the Company has monopolized alleged markets for single serve coffee brewers and single serve coffee pods, including through its contracts with suppliers and distributors and in connection with the launch of the Keurig® 2.0.  The TreeHouse complaint sought monetary damages, declaratory relief, injunctive relief, and attorneys’ fees.

 

On March 13, 2014, JBR, Inc.  (d/b/a Rogers Family Company) filed suit against Keurig Green Mountain, Inc.  in the U.S.  District Court for the Eastern District of California ( JBR, Inc.  v.  Keurig Green Mountain, Inc. , No.  2:14-cv-00677-KJM-CKD).  The claims asserted and relief sought in the JBR complaint were substantially similar to the claims asserted and relief sought in the TreeHouse complaint.

 

Additionally, beginning on March 10, 2014, twenty-seven putative class actions asserting similar claims and seeking similar relief were filed on behalf of purported direct and indirect purchasers of the Company’s products in various federal district courts.  On June 3, 2014, the Judicial Panel on Multidistrict Litigation (the “JPML”) granted a motion to transfer these various actions, including the TreeHouse and JBR actions, to a single judicial district for coordinated or consolidated pre-trial proceedings.  The actions are now pending before Judge Vernon S.  Broderick in the Southern District of New York (In re: Keurig Green Mountain Single-Serve Coffee Antitrust Litigation, No.  1:14-md-02542-VSB) (the “Multidistrict Antitrust Litigation”).  On August 11, 2014, JBR filed a motion for a preliminary injunction, which the Company opposed.  After a hearing, the district court in the Multidistrict Antitrust Litigation denied JBR’s motion by order dated September 19, 2014.  JBR appealed the district court’s denial of the preliminary injunction to the United States Court of Appeals for the Second Circuit; the appeal was fully briefed on March 3, 2015.  On September 30, 2015, the Court of Appeals heard oral argument on the appeal.  On October 26, 2015, the Court of Appeals affirmed the district court’s denial of JBR’s motion for a preliminary injunction.

 

Consolidated putative class action complaints by direct purchaser and indirect purchaser plaintiffs were filed on July 24, 2014.  The Company filed motions to dismiss these complaints and the complaints in the TreeHouse and JBR actions on October 6, 2014.  On November 25, 2014, all plaintiffs filed amended complaints and on February 2, 2015 the Company again moved to dismiss.  Plaintiffs filed opposition briefs on April 10, 2015, and the Company filed reply briefs on May 11, 2015.  Oral argument on the Company’s motions to dismiss was held on July 9, 2015.  The court has not yet issued a decision on the motions to dismiss.

 

On August 21, 2015, a putative class action complaint was filed against the Company in the Circuit Court of Faulkner County, Arkansas ( Julie Rainwater et al.  v.  Keurig Green Mountain, Inc. , No.  23CV-15-818) (the “Rainwater Action”).  The allegations raised in the Rainwater Action are substantially similar to the allegations in the complaints filed in the Multidistrict Antitrust Litigation.  Like the complaint filed by the putative class of indirect purchaser plaintiffs in the Multidistrict Antitrust Litigation, the Rainwater Action seeks relief under Arkansas state law on behalf of a putative class of indirect purchasers of K-Cup portion packs in the state of Arkansas.  On September 21, 2015, the Company removed the Rainwater Action to the U.S.  District Court for the Eastern District of Arkansas (No.  4:15-cv-590-JLH).  On September 25, 2015, the Company filed a Notice of Potential Tag-Along Action with the JPML, and on November 10, 2015, the JPML ordered the transfer of the Rainwater Action to the Southern District of New York for inclusion in the Multidistrict Antitrust Litigation.

 

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On September 30, 2014, a statement of claim was filed against the Company and Keurig Canada Inc.  in Ontario, Canada by Club Coffee L.P.  (“Club Coffee”), a Canadian manufacturer of single serve beverage pods, claiming damages of CDN $600 million and asserting a breach of competition law and false and misleading statements by the Company.  Following the filing by the Company and Keurig Canada of a notice of motion for a motion to strike the claims made by Club Coffee for failure to state a reasonable cause of action, on August 31, 2015 Club Coffee filed a second amended statement of claim against the Company and Keurig Canada Inc.  claiming the same amount of damages as in the original statement of claim.

 

The Company intends to vigorously defend all of the pending lawsuits.  At this time, the Company is unable to predict the outcome of these lawsuits, the potential 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.

 

Employment Class Action

 

A putative employment class action, captioned Alvaro Sanchez v. Keurig Green Mountain, Inc. and Does 1 - 10 0, was filed against Keurig in the Superior Court of California County of Monterey on July 14, 2015.  The complaint alleges that the Company failed to pay proper wages and provide certain breaks to non-exempt employees of the Company’s processing plant located in Castroville, California during the class period (which is defined as the period of time beginning four years before the commencement of the action through the date on which judgment on the action becomes final).  The complaint seeks alleged damages, attorneys’ fees, penalties, and injunctive and equitable relief on behalf of the putative class.  The Company filed its Answer denying all substantive allegations and removed the lawsuit to the United States District Court for the Northern District of California.  The Company intends to vigorously defend itself against this complaint.  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.

 

Product Liability

 

In November 2014, the Company informed the U.S.  Consumer Product Safety Commission (“CPSC”) and Health Canada that it identified a potential issue involving certain Keurig® MINI Plus (non-reservoir) brewers (K10 and B31 models), where on very rare occasions, hot liquid could escape the brewer.  On December 23, 2014 the Company issued a recall for its Keurig® MINI Plus brewers.  On April 17, 2015 the CPSC notified the Company that it had commenced a routine investigation of the recall and the Company is cooperating with the CPSC on this matter.  These actions did not materially change the Company’s estimate for the reserve or the anticipated insurance recovery; however, as the total charge recorded to date is based on estimates, the Company’s ultimate liability and recovery may exceed or be less than the amounts recorded.  Based on current information known to the Company, the Company believes that this issue will not have a material adverse effect on the consolidated financial position, results of operations or cash flows of the Company.

 

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19.        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 26,
2015

 

December 27,
2014

 

Numerator for basic and diluted earnings per share:

 

 

 

 

 

Net income attributable to Keurig

 

$

104,497

 

$

134,579

 

Denominator:

 

 

 

 

 

Basic weighted-average shares outstanding

 

150,236,842

 

162,181,332

 

Effect of dilutive securities

 

722,306

 

1,893,706

 

Diluted weighted-average shares outstanding

 

150,959,148

 

164,075,038

 

 

 

 

 

 

 

Basic net income per common share

 

$

0.70

 

$

0.83

 

Diluted net income per common share

 

$

0.69

 

$

0.82

 

 

For the thirteen weeks ended December 26, 2015 and December 27, 2014, shares related to equity-based compensation of approximately 969,000 and 74,000, respectively, were excluded from the calculation of diluted earnings per share because they were antidilutive.

 

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 Keurig Green Mountain, Inc.  (together with its subsidiaries, the “Company”, “Keurig”, “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 believe that we are a leader in coffeemakers and specialty coffee in the United States and Canada.  We consider ourselves an innovative, technology-driven, values-based personal beverage system company.  Our multi-brand beverage and beverage system portfolio is aimed at changing the way consumers prepare and enjoy coffee and other beverages both at home and away from home.  We develop and sell a variety of Keurig ® beverage systems and, in addition to specialty coffee, produce and sell a variety of other specialty beverages in pods (including hot apple cider, hot and iced teas, iced coffees, iced fruit brews, hot cocoa and other beverages) for use with our Keurig ®  hot brewing systems.  Our product line also includes the Keurig ®  KOLD  beverage system, which mixes and dispenses a wide variety of cold still and carbonated beverages, in a countertop footprint, using a KOLD  beverage pod.  In addition, we offer traditional whole bean and ground coffee in other package types including bags, fractional packages and cans.

 

Proposed Merger

 

On December 6, 2015, we entered into an Agreement and Plan of Merger (the “Merger Agreement”), by and among Acorn, Acquisition Sub, the Company and, solely for purposes of Article IX of the Merger Agreement, JAB.  Subject to the terms and conditions of the Merger Agreement, Acquisition Sub will be merged with and into the Company (the “Merger”), with the Company surviving the Merger as a wholly-owned subsidiary of Acorn.

 

For additional information related to the Merger Agreement please refer to our Current Report on Form 8-K filed with the SEC on December 8, 2015, which includes the full text of the Merger Agreement as Exhibit 2.1, and Note 2, Recent Developments , in the accompanying unaudited Consolidated Financial Statements.

 

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Products

 

Pods

 

We offer hot system pods of varying sizes including single serve K-Cup ® , Vue ® , and K-Mug  pods as well as multi-serve K-Carafe  pods capable of producing a three to four cup carafe.  We offer high-quality Arabica bean coffee including single-origin, Fair Trade Certified , Rain Forest Alliance Certified , organic, flavored, limited edition and proprietary blends.  We also procure Robusta bean coffee for use in certain blends.  We carefully select our coffee beans and appropriately roast the coffees to optimize their taste and flavor differences.  We manufacture and sell pods of our own brands, such as Green Mountain Coffee, The Original Donut Shop and Van Houtte, as well as participating brands through licensing and manufacturing agreements, including brands such as Dunkin’ Donuts , Eight O’Clock ® , Folgers ® , Kirkland Signature , Newman’s Own ®  Organics, Peet’s and Starbucks ® . The Company also has licensing agreements for manufacturing, distributing, and selling tea under brands such as Lipton ® , Celestial Seasonings ® , Snapple ® , Tazo ®  and Teavana ® . In addition to coffee and tea, we also produce and sell pods for lemonade, hot apple cider, cocoa and other dairy-based beverages.

 

Hot System Brewers and Accessories

 

We are a leader in sales of coffeemakers in the U.S. and Canada.  During our 2015 fiscal year, we had the top seven best-selling at-home coffeemakers by dollar volume in the United States according to the NPD Group for consumer market research data in the United States.  Under the Keurig ®  K-Cup ® , Keurig ®  Vue ® , and Keurig ®  2.0 brand names, we offer a variety of commercial and home use brewers for the away from home (“AFH”) and at home (“AH”) channels differentiated by features and size.

 

In addition, we have license agreements under which licensees manufacture, market and sell coffeemakers co-branded with “Keurig ®  Brewed”.  Licensees include Jarden Consumer Solutions selling a “Mr. Coffee ® ” branded brewer, Conair Corporation selling a “Cuisinart ® ” branded brewer through May 2016, and GE Appliances selling a “GE Café ” series refrigerator which includes a built in Keurig ®  K-Cup ®  brewing system.

 

We offer a variety of accessories for the Keurig ®  brewing platforms and also sell other coffee-related equipment and accessories.

 

KOLD TM  Beverage System

 

We launched the Keurig ®  KOLD  beverage system on a limited basis beginning in the first quarter of fiscal 2016.  We believe the Keurig ®  KOLD  beverage system shares the same consumer benefits as the Keurig ®  hot beverage system:  quality, convenience, choice and simplicity.  The Keurig ®  KOLD  beverage system creates a wide variety of cold still and carbonated beverages, in a countertop footprint, using a KOLD  beverage pod.  KOLD  beverage brands include partner brands with The Coca-Cola Company and licensed brands with the Dr Pepper Snapple Group, as well as our own brands.  We expect to add additional beverage brands and new partners in the future.  In the near term, we do not expect the Keurig ®  KOLD  beverage system to be profitable or for revenue from the Keurig ®  KOLD  beverage system to be material to the Company.

 

Other Products and Royalties

 

We sell coffee in other package types in addition to pods such as bagged coffee and cans (for the grocery and mass channels) and fractional packages and ancillary products (for the office coffee and food service channels).  We also earn royalties from licensees under various licensing agreements.

 

In recent years, growth in the coffee industry has come from the specialty coffee category in the U.S.  and Canada.  Single serve has been the fastest growing segment of the specialty coffee category.  Concurrently, consumers are more frequently seeking to enjoy premium experiences within the comfort and convenience of their own homes, including the consumption of specialty coffee.  We have benefited from these broad consumer trends and believe we will continue to be a leader in the hot beverage marketplace because of our carefully developed and distinctive advantages over our competitors, including quality, convenience and choice.

 

In recent years, our business has been driven predominantly by an increase in adoption of Keurig ®  hot brewing systems, which include both the brewer and the related pods.  In fiscal 2015, approximately 95% of our consolidated net sales were attributed to the combination of pods and Keurig ®  hot brewing systems and related accessories.

 

We believe the primary consumer benefits delivered by our Keurig ®  beverage systems are as follows:

 

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

 

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