Keurig Green Mountain, Inc.
GREEN MOUNTAIN COFFEE ROASTERS INC (Form: 10-Q, Received: 05/06/2010 16:11:58)

 

 

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the thirteen weeks ended March 27, 2010

OR

 

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

For the transition period from              to             

Commission file number 1-12340

 

 

GREEN MOUNTAIN COFFEE ROASTERS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   03-0339228

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

33 Coffee Lane, Waterbury, Vermont 05676

(Address of principal executive offices) (zip code)

(802) 244-5621

(Registrants’ telephone number, including area code)

 

(Former name, former address and former fiscal year, if changed since last report.)

 

 

Indicate by check mark whether the registrant has (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES   x     NO   ¨

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   ¨     NO   ¨

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   ¨
Non-accelerated filer   ¨    Smaller Reporting Company   ¨

Indicate by check mark whether the Registrant is a shell company (as defined in rule 12b-2 of the Exchange Act)    YES   ¨     NO   x

As of May 3, 2010, 43,858,755 shares of common stock of the registrant were outstanding.

 

 

 


Part I. Financial Information

Item 1. Financial Statements

GREEN MOUNTAIN COFFEE ROASTERS, INC.

Unaudited Consolidated Balance Sheets

(Dollars in thousands)

 

     March 27,
2010
    September 26,
2009
 
Assets     

Current assets:

    

Cash and cash equivalents

   $ 144,135      $ 241,811   

Restricted cash and cash equivalents

     70        280   

Short-term investments

     —          50,000   

Receivables, less uncollectible accounts and return allowances of $8,468 and $4,792 at March 27, 2010 and September 26, 2009, respectively

     128,198        91,559   

Income tax receivable

     6,243        —     

Inventories

     109,929        137,294   

Other current assets

     23,779        9,517   

Deferred income taxes, net

     11,932        10,151   
                

Total current assets

     424,286        540,612   

Fixed assets, net

     180,043        135,981   

Intangibles, net

     129,575        36,478   

Goodwill

     168,897        99,600   

Other long-term assets

     8,999        3,979   
                

Total assets

   $ 911,800      $ 816,650   
                
Liabilities and Stockholders’ Equity     

Current liabilities:

    

Current portion of long-term debt

   $ 5,062      $ 5,030   

Accounts payable

     89,532        79,772   

Accrued compensation costs

     16,245        17,264   

Accrued expenses

     32,568        18,570   

Income tax payable

     —          2,971   

Other short-term liabilities

     2,525        3,257   
                

Total current liabilities

     145,932        126,864   

Long-term debt

     67,642        73,013   

Deferred income taxes, net

     53,376        26,599   

Other long-term liabilities

     5,123        —     

Commitments and contingencies

    

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 - 200,000,000 shares; Issued - 43,846,000 and 43,603,684 shares at March 27, 2010 and September 26, 2009, respectively

     4,384        4,360   

Additional paid-in capital

     462,565        450,596   

Retained earnings

     174,358        137,162   

Accumulated other comprehensive loss

     (1,506     (1,870

ESOP unallocated shares, at cost - 12,687 shares at March 27, 2010 and September 26, 2009

     (74     (74
                

Total stockholders’ equity

     639,727        590,174   
                

Total liabilities and stockholders’ equity

   $ 911,800      $ 816,650   
                

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


GREEN MOUNTAIN COFFEE ROASTERS, INC.

Unaudited Consolidated Statements of Operations

(Dollars in thousands except per share data)

 

     Thirteen
weeks ended
March 27,
2010
    Thirteen
weeks ended
March 28,
2009
 

Net sales

   $ 324,915      $ 193,351   

Cost of sales

     216,263        131,370   
                

Gross profit

     108,652        61,981   

Selling and operating expenses

     42,979        28,094   

General and administrative expenses

     24,464        11,245   
                

Operating income

     41,209        22,642   

Other expense

     (133     (242

Interest expense

     (833     (1,032
                

Income before income taxes

     40,243        21,368   

Income tax expense

     (15,541     (8,385
                

Net income

   $ 24,702      $ 12,983   
                

Basic income per share:

    

Weighted average shares outstanding

     43,754,546        37,125,038   

Net income

   $ 0.56      $ 0.35   

Diluted income per share:

    

Weighted average shares outstanding

     45,943,858        39,020,058   

Net income

   $ 0.54      $ 0.33   

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


GREEN MOUNTAIN COFFEE ROASTERS, INC.

Unaudited Consolidated Statements of Operations

(Dollars in thousands except per share data)

 

     Twenty-six
weeks ended
March 27,
2010
    Twenty-six
weeks ended
March 28,
2009
 

Net sales

   $ 674,278      $ 390,331   

Cost of sales

     463,801        275,000   
                

Gross profit

     210,477        115,331   

Selling and operating expenses

     98,558        64,275   

General and administrative expenses

     47,636        20,456   

Patent litigation settlement

     —          (17,000
                

Operating income

     64,283        47,600   

Other expense

     (244     (285

Interest expense

     (1,881     (2,414
                

Income before income taxes

     62,158        44,901   

Income tax expense

     (24,962     (17,534
                

Net income

   $ 37,196      $ 27,367   
                

Basic income per share:

    

Weighted average shares outstanding

     43,705,417        36,902,634   

Net income

   $ 0.85      $ 0.74   

Diluted income per share:

    

Weighted average shares outstanding

     45,876,132        38,824,107   

Net income

   $ 0.81      $ 0.70   

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


GREEN MOUNTAIN COFFEE ROASTERS, INC.

Unaudited Consolidated Statements of Comprehensive Income

(Dollars in thousands)

 

     Thirteen
weeks ended
March 27,
2010
    Thirteen
weeks ended
March 28,
2009
   Twenty-six
weeks ended
March 27,
2010
    Twenty-six
weeks  ended
March 28,
2009
 

Net income

   $ 24,702      $ 12,983    $ 37,196      $ 27,367   

Other comprehensive income, net of tax:

         

Deferred (loss) gain on derivatives designated as cash flow hedges

     190        127      476        (2,282

(Gain) loss on derivatives designated as cash flow hedges reclassified to net income

     (122     79      (112     89   
                               

Other comprehensive gain (loss)

     68        206      364        (2,193
                               

Comprehensive income

   $ 24,770      $ 13,189    $ 37,560      $ 25,174   
                               

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


GREEN MOUNTAIN COFFEE ROASTERS, INC.

Unaudited Consolidated Statement Of Changes In Stockholders’ Equity

For the Period Ended March 27, 2010 (Dollars in thousands)

 

     Common stock    Additional
paid-in
capital
   Retained
earnings
   Accumulated
other compre-
hensive (loss)
    ESOP unallocated
shares
    Stockholders’
Equity
   Shares    Amount            Shares     Amount    

Balance at September 26, 2009

   43,603,684    $ 4,360    $ 450,596    $ 137,162    $ (1,870   (12,687   $ (74   $ 590,174

Options exercised

   208,482      21      1,398      —        —        —          —          1,419

Issuance of common stock under employee stock purchase plan

   33,834      3      2,131      —        —        —          —          2,134

Stock compensation expense

   —        —        3,848      —        —        —          —          3,848

Tax benefit from exercise of options

   —        —        4,514      —        —        —          —          4,514

Deferred compensation expense

   —        —        78      —        —        —          —          78

Other comprehensive income, net of tax

   —        —        —        —        364      —          —          364

Net income

   —        —        —        37,196      —        —          —          37,196
                                                      

Balance at March 27, 2010

   43,846,000    $ 4,384    $ 462,565    $ 174,358    $ (1,506   (12,687   $ (74   $ 639,727
                                                      

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


GREEN MOUNTAIN COFFEE ROASTERS, INC.

Unaudited Consolidated Statements of Cash Flows

(Dollars in thousands)

 

     Twenty-six
weeks  ended
March 27,
2010
    Twenty-six
weeks ended
March 28,
2009
 

Cash flows from operating activities:

    

Net income

   $ 37,196      $ 27,367   

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

    

Depreciation

     12,667        8,477   

Amortization of intangibles

     5,204        2,406   

Loss on disposal of fixed assets

     451        144   

Provision for doubtful accounts

     240        131   

(Gain) loss on futures derivatives

     (112     89   

Tax expense from exercise of non-qualified options and disqualified dispositions of incentive stock options

     22        21   

Excess tax benefits from equity-based compensation plans

     (4,492     (5,371

Deferred income taxes

     (2,444     (1,960

Deferred compensation and stock compensation

     3,926        3,027   

Changes in assets and liabilities, net of effects of acquisition:

    

Receivables

     (28,147     (16,484

Inventories

     34,276        16,001   

Income tax receivable

     (4,722     8,719   

Other current assets

     (5,558     (150

Other long-term assets, net

     102        359   

Accounts payable

     6,547        5,576   

Accrued compensation costs

     (1,151     (1,011

Accrued expenses

     11,499        5,642   
                

Net cash provided by operating activities

     65,504        52,983   

Cash flows from investing activities:

    

Proceeds from sale of short-term investments

     50,000        —     

Acquisition of Timothy’s Coffee of the World Inc.

     (154,208     —     

Acquisition of Tully’s Coffee Corporation

     —          (41,451

Advance on acqusition of Diedrich Coffee, Inc. (See Note 15)

     (8,500     —     

Capital expenditures for fixed assets

     (53,175     (14,516

Proceeds from disposal of fixed assets

     183        93   
                

Net cash used for investing activities

     (165,700     (55,874

Cash flows from financing activities:

    

Net change in revolving line of credit

     (3,000     (5,000

Proceeds from issuance of common stock under compensation plans

     3,553        4,372   

Excess tax benefits from equity-based compensation plans

     4,492        5,371   

Capital lease obligations

     (25     —     

Repayment of long-term debt

     (2,500     (17
                

Net cash provided by financing activities

     2,520        4,726   

Net increase (decrease) in cash and cash equivalents

     (97,676     1,835   

Cash and cash equivalents at beginning of period

     241,811        804   
                

Cash and cash equivalents at end of period

   $ 144,135      $ 2,639   
                

Supplemental disclosures of cash flow information:

    

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

   $ 8,870      $ 5,348   

Noncash financing activity:

    

Liabilities assumed in conjunction with acquisition

   $ 1,533      $ 210   

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


Green Mountain Coffee Roasters, Inc.

Notes to Unaudited Consolidated Financial Statements

 

1. Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles 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 generally accepted accounting principles for complete consolidated financial statements.

In the opinion of management, all adjustments considered necessary for a fair presentation of the interim financial data have been included. Results from operations for the thirteen and twenty-six week periods ended March 27, 2010 are not necessarily indicative of the results that may be expected for the fiscal year ending September 25, 2010.

The September 26, 2009 balance sheet data was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America. For further information, refer to the consolidated financial statements and the footnotes included in the annual report on Form 10-K for Green Mountain Coffee Roasters, Inc. for the fiscal year ended September 26, 2009. Throughout this presentation, we refer to the consolidated company as the “Company”.

The Company has revised the classification of certain information presented in its fiscal 2009 Unaudited Consolidated Balance Sheet to conform to its fiscal 2010 presentation.

 

2. Segment Reporting

The Company manages its operations through two business segments: Specialty Coffee business unit (“SCBU”) and Keurig business unit (“Keurig”). SCBU sells whole bean and ground coffee, as well as K-Cup ® portion packs containing coffee, tea and cocoa, and to a lesser extent, Keurig ® single-cup brewers and other accessories mainly in North American wholesale and retail channels, and directly to consumers. The majority of SCBU’s revenue is derived from its North American wholesale channels.

Keurig sells their single cup brewers and related accessories, as well as coffee, tea, and cocoa in K-Cup portion packs produced by a variety of licensed roasters, including SCBU, and related accessories mainly in North American wholesale and retail channels. Keurig earns royalty income from K-Cups shipped by its licensed roasters. Throughout this report, unless otherwise noted, the information provided is on a consolidated basis.

The Company evaluates performance based on several factors, including business segment income before taxes. The operating segments do not share manufacturing or distribution facilities, except for brewer fulfillment at our Knoxville facility. In the event any materials and/or services are provided to one segment by the other, the transaction is valued at estimated market price and eliminated in consolidation. The costs of the Company’s manufacturing operations are captured within the SCBU segment while the Keurig segment does not have manufacturing facilities and purchases its saleable products from third parties, including SCBU. The Company’s property, plant and equipment, inventory and accounts receivable are captured and reported discretely within each operating segment.

Expenses not specifically related to either operating segment are shown separately as “Corporate”. Corporate expenses are comprised mainly of the compensation and other related expenses of the Company’s Chief Executive Officer, Chief Financial Officer, Chief Information Officer, Corporate General Counsel and Secretary, Vice President Human Resources, Vice President of Corporate Social Responsibility, Vice President of Environmental Affairs and other selected employees who perform duties related to our entire enterprise. Corporate expenses also include interest expense, certain corporate legal and acquisition-related expenses and compensation of the board of directors. In addition, fiscal 2009 corporate expenses are offset by $17,000,000 of proceeds received from a litigation settlement with Kraft. Corporate assets include cash and short-term investments.


Goodwill and intangibles related to the Frontier Natural Products Co-op, Tully’s and Timothy’s acquisitions are included in the SCBU reporting unit of the Company. Goodwill and intangibles related to Green Mountain Coffee Roasters, Inc.’s acquisition of Keurig are included in the Keurig reporting unit of the Company.

Selected financial data for segment disclosures for the thirteen weeks ended March 27, 2010 and March 28, 2009 are as follows:

 

    Thirteen weeks ended March 27, 2010
(Dollars in thousands)
    SCBU    Keurig    Corporate     Eliminations     Consolidated

Sales to unaffiliated customers

  $ 153,614    $ 171,301    $ —        $ —        $ 324,915

Intersegment sales

  $ 67,948    $ 40,986    $ —        $ (108,934   $ —  

Net sales

  $ 221,562    $ 212,287    $ —        $ (108,934   $ 324,915

Income before taxes

  $ 30,536    $ 20,847    $ (10,894   $ (246   $ 40,243

Total assets

  $ 535,122    $ 298,335    $ 144,205      $ (65,862   $ 911,800

Stock compensation

  $ 637    $ 491    $ 792      $ —        $ 1,920

Interest expense

  $ —      $ —      $ 833      $ —        $ 833

Property additions

  $ 24,427    $ 5,567    $ —        $ —        $ 29,994

Depreciation and amortization

  $ 8,061    $ 1,814    $ —        $ —        $ 9,875
    Thirteen weeks ended March 28, 2009
(Dollars in thousands)
    SCBU    Keurig    Corporate     Eliminations     Consolidated

Sales to unaffiliated customers

  $ 91,177    $ 102,174    $ —        $ —        $ 193,351

Intersegment sales

  $ 22,088    $ 17,590    $ —        $ (39,678   $ —  

Net sales

  $ 113,265    $ 119,764    $ —        $ (39,678   $ 193,351

Income before taxes

  $ 12,835    $ 13,522    $ (4,753   $ (236   $ 21,368

Total assets

  $ 364,519    $ 190,795    $ 3,052      $ (149,458   $ 408,908

Stock compensation

  $ 498    $ 458    $ 570      $ —        $ 1,526

Interest expense

  $ —      $ —      $ 1,032      $ —        $ 1,032

Property additions

  $ 10,592    $ 258    $ —        $ —        $ 10,850

Depreciation and amortization

  $ 3,801    $ 1,721    $ —        $ —        $ 5,522


Selected financial data for segment disclosures for the twenty-six weeks ended March 27, 2010 and March 28, 2009 are as follows:

 

     Twenty-six weeks ended March 27, 2010
     (Dollars in thousands)
     SCBU    Keurig    Corporate     Eliminations     Consolidated

Sales to unaffiliated customers

   $ 285,188    $ 389,090    $ —        $ —        $ 674,278

Intersegment sales

   $ 129,211    $ 77,722    $ —        $ (206,933   $ —  

Net sales

   $ 414,399    $ 466,812    $ —        $ (206,933   $ 674,278

Income before taxes

   $ 59,147    $ 28,168    $ (21,974   $ (3,183   $ 62,158

Total assets

   $ 535,122    $ 298,335    $ 144,205      $ (65,862   $ 911,800

Stock compensation

   $ 1,321    $ 998    $ 1,529      $ —        $ 3,848

Interest expense

   $ —      $ —      $ 1,881      $ —        $ 1,881

Property additions

   $ 41,647    $ 7,889    $ —        $ —        $ 49,536

Depreciation and amortization

   $ 14,406    $ 3,465    $ —        $ —        $ 17,871
     Twenty-six weeks ended March 28, 2009
     (Dollars in thousands)
     SCBU    Keurig    Corporate     Eliminations     Consolidated

Sales to unaffiliated customers

   $ 182,802    $ 207,529    $ —        $ —        $ 390,331

Intersegment sales

   $ 36,271    $ 33,171    $ —        $ (69,442   $ —  

Net sales

   $ 219,073    $ 240,700    $ —        $ (69,442   $ 390,331

Income before taxes

   $ 22,365    $ 15,023    $ 8,557      $ (1,044   $ 44,901

Total assets

   $ 364,519    $ 190,795    $ 3,052      $ (149,458   $ 408,908

Stock compensation

   $ 1,031    $ 883    $ 1,042      $ —        $ 2,956

Interest expense

   $ —      $ —      $ 2,414      $ —        $ 2,414

Property additions

   $ 15,185    $ 1,003    $ —        $ —        $ 16,188

Depreciation and amortization

   $ 7,469    $ 3,414    $ —        $ —        $ 10,883

 


3. Acquisition of Certain Assets of Timothy’s Coffee of the World Inc.

On November 13, 2009, the Company acquired all of the outstanding capital stock of Timothy’s Coffee of the World Inc. (“Timothy’s”), which included its brand and wholesale coffee business. Timothy’s will be maintained as a wholly-owned Canadian subsidiary, with operations integrated into the SCBU segment. The acquisition was completed on November 13, 2009, and Timothy’s results of operations have been included in the Company’s consolidated financial statements as of that date. Timothy’s functional currency is the U.S. dollar.

Timothy’s wholesale business produces specialty coffee, tea and other beverages in a variety of packaged forms, including K-Cup ® portion packs, and sold under various brand names. The acquisition provides the Company with a Canadian presence, the Timothy’s brand name and a coffee roasting and packaging facility in Toronto.

Total consideration under the terms of the Share Purchase Agreement (the “Agreement”) amounted to approximately $155,740,000 in U.S dollars. The Agreement contains customary representations, warranties and covenants given by the parties. The total cash disbursement associated with the Agreement was $154,207,000 and the Company assumed liabilities of $1,533,000 which were recorded as a noncash transaction.

The allocation of the purchase price based on fair value of the acquired assets less liabilities assumed is as follows:

 

Accounts receivable

   $ 8,732,000   

Inventory

     6,911,000   

Other current assets

     83,000   

Fixed assets

     7,827,000   

Intangibles

     98,300,000   

Goodwill

     69,297,000   

Accounts payable

     (6,852,000

Accrued compensation costs

     (132,000

Accrued expenses

     (966,000

Capital lease

     (186,000

Deferred income taxes

     (27,274,000
        

Total

   $ 155,740,000   
        

Acquisition costs related to Timothy’s have been expensed as incurred and are included in general and administrative expenses in the Statement of Operations. Total acquisition-related costs of approximately $2,000,000 were expensed in the thirteen weeks ended December 26, 2009.

Amortizable intangible assets acquired include approximately $83,200,000 for customer relationships with an estimated life of 16 years, approximately $8,900,000 for the Timothy’s trade name with an estimated life of 11 years and approximately $6,200,000 for supply agreements with an estimated life of 11 years. The weighted-average amortization period for these assets is 15.2 years and will be amortized on a straight-line basis over their respective useful lives. Amortization expense for these intangibles (gross of tax) is expected to be approximately $5,757,000 for fiscal 2010 and $6,573,000 in each of the fiscal years 2011 through 2015.


The cost of the acquisition in excess of the fair market value of assets acquired less liabilities assumed represents acquired goodwill of approximately $69,297,000. The acquisition provides the Company with a Canadian presence and manufacturing and distribution synergies, which provide the basis of goodwill recognized. Goodwill and intangible assets related to this acquisition are reported in the SCBU segment of the Company. The goodwill recognized is not deductible for tax purposes.

The following represents the change in goodwill since the beginning of the period:

 

     SCBU    Keurig    Total

Balance at September 26, 2009

   $ 27,226    $ 72,374    $ 99,600

Acquisition of Timothy’s

     69,297      —        69,297
                    

Balance at March 27, 2010

   $ 96,523    $ 72,374    $ 168,897
                    

The Company has not recognized any impairment loss associated with the reporting units.

During the thirteen weeks ended March 27, 2010, the Company revised the carrying amount of goodwill recorded for the Timothy’s acquisition by approximately $534,000 due to the final reconciliation of working capital.

The acquisition was completed on November 13, 2009 and accordingly results of operations from such date have been included in the Company’s Statement of Operations. For the twenty-six weeks ended March 27, 2010, Timothy’s contributed approximately $26,288,000 in revenue and $5,422,000 of income before taxes.

Supplemental Proforma Information

The following information reflects the Timothy’s acquisition as if the transaction had occurred as of the beginning of the annual 2010 reporting period and for the comparative period, as if the transaction occurred as of the beginning of the 2009 reporting period. The pro forma information does not necessarily reflect the actual results that would have occurred had the Company and Timothy’s been combined during the periods presented, nor is it necessarily indicative of the future results of operations of the combined companies.

The following table represents select consolidated proforma data:

 

     Thirteen
weeks ended
March 28,
2009
   Twenty-six
weeks ended
March 27,
2010
   Twenty-six
weeks ended
March 28,
2009

Consolidated proforma revenue

   200,626    679,825    405,797

Consolidated proforma net income

   13,753    38,159    28,716

Consolidated proforma diluted earnings per share

   0.35    0.83    0.74

 

4. Inventories

Inventories consisted of the following at:

 

     March 27,
2010
   September 26,
2009

Raw materials and supplies

   $ 29,083,000    $ 26,015,000

Finished goods

     80,846,000      111,279,000
             
   $ 109,929,000    $ 137,294,000
             

Inventory values above are presented net of obsolescence allowances of $1,452,000 and $704,000 at March 27, 2010 and September 26, 2009, respectively.

At March 27, 2010, the Company had approximately $133,846,000 in green coffee purchase commitments, of which approximately 58% had a fixed price. These commitments extend through 2012. The value of the variable portion of these commitments was calculated using an average “c” price of coffee of $1.32 per pound at March 27, 2010. In addition to its green coffee commitments, the Company had approximately $187,636,000 in fixed-price brewer inventory purchase commitments and $157,651,000 in production raw materials commitments at March 27, 2010. The Company believes based on relationships established with its suppliers that the risk of non-delivery on such purchase commitments is remote.


5. Fixed Assets

Fixed assets consist of the following:

 

     Useful Life in Years    March 27,
2010
    September 26,
2009
 

Production equipment

   1-15    $ 116,312,000      $ 91,343,000   

Equipment on loan to wholesale customers

   3-7      13,188,000        13,278,000   

Computer equipment and software

   1-10      43,267,000        34,018,000   

Land

   Indefinite      1,743,000        1,391,000   

Building and building improvements

   4-30      20,340,000        15,412,000   

Furniture and fixtures

   1-15      9,569,000        9,064,000   

Vehicles

   4-5      1,265,000        1,181,000   

Leasehold improvements

   1-20 or remaining
life of lease, whichever is
less
     12,644,000        9,197,000   

Construction-in-progress

        38,753,000        27,332,000   
                   

Total fixed assets

        257,081,000        202,216,000   

Accumulated depreciation

        (77,038,000     (66,235,000
                   
      $ 180,043,000      $ 135,981,000   
                   

Total depreciation expense relating to all fixed assets was $6,814,000 and $4,319,000 for the thirteen weeks ended March 27, 2010 and March 28, 2009, respectively. Total depreciation expense relating to all fixed assets was $12,667,000 and $8,477,000 for the twenty-six weeks ended March 27, 2010 and March 28, 2009, respectively.

Assets classified as construction-in-progress are not depreciated, as they are not ready for production use. All assets classified as construction-in-progress on March 27, 2010 are expected to be in production use in the next twelve months.

In the thirteen and twenty-six weeks ended March 27, 2010, the Company capitalized $379,000 and $710,000 of interest expense, respectively.

In the thirteen and twenty-six weeks ended March 28, 2009, the Company capitalized $80,000 and $153,000 of interest expense, respectively.

 

6. Intangible Assets

Intangible assets consist of the following:

 

     March 27, 2010     September 26, 2009  
     Gross Carrying
Amount
   Accumulated
Amortization
    Gross Carrying
Amount
   Accumulated
Amortization
 

Intangible assets subject to amortization

          

Acquired technology

   $ 21,317,000    $ (10,525,000   $ 21,317,000    $ (9,587,000

Customer and roaster agreements

     25,900,000      (9,219,000     19,700,000      (7,820,000

Customer relationships

     93,568,000      (2,797,000     10,367,000      (428,000

Trade names

     12,356,000      (1,117,000     3,456,000      (633,000

Non-compete agreements

     374,000      (282,000     374,000      (268,000
                              

Total

   $ 153,515,000    $ (23,940,000   $ 55,214,000    $ (18,736,000
                              

All intangible assets are subject to amortization and the Company calculates amortization expense over the period of expected economic benefit. Total amortization expense was $3,061,000 and $1,203,000 for the thirteen weeks ended March 27, 2010 and March 28, 2009, respectively. Total amortization expense was $5,204,000 and $2,406,000 for the twenty-six weeks ended March 27, 2010 and March 28, 2009, respectively.


The estimated aggregate amortization expense for the remainder of fiscal 2010 and for each of the next five years is as follows:

 

2010

   $ 6,081,000

2011

   $ 12,137,000

2012

   $ 11,898,000

2013

   $ 11,752,000

2014

   $ 11,144,000

Thereafter

   $ 76,563,000

 

7. Product Warranties

The Company offers a one-year warranty on all Keurig brewers it sells. Keurig provides for the estimated cost of product warranties, primarily using historical information and repair or replacement costs, at the time product revenue is recognized. During the second quarter of fiscal 2010, the Company experienced higher warranty returns associated with certain brewer models. The quality issue did not represent a safety concern, and is believed to be tied to a component used in limited production from late 2009. The Company is replacing any brewers exhibiting the quality issue and has implemented hardware and software changes which it believes have corrected the issue. Primarily as a result of these higher returns, the Company charged $6,383,000 to warranty expense during the second quarter of fiscal 2010 as compared to $940,000 in the second quarter of fiscal 2009.

The changes in the carrying amount of product warranties for the twenty-six weeks ended March 27, 2010 and March 28, 2009 are as follows:

 

Twenty-six weeks ended March 27, 2010

 

  

Balance at September 26, 2009

   $ 724,000   

Provision charged to income

     8,715,000   

Usage

     (6,161,000
        

Balance at March 27, 2010

   $ 3,278,000   
        

Twenty-six weeks ended March 28, 2009

 

  

Balance at September 27, 2008

   $ 648,000  

Provision charged to income

     2,087,000   

Usage

     (1,711,000
        

Balance at March 28, 2009

   $ 1,024,000   
        

 

8. Financial Instruments

The Company is exposed to certain risks relating to ongoing business operations. The primary risks that are mitigated by financial instruments are interest rate risk and commodity price risk. The Company uses interest rate swaps to mitigate interest rate risk associated with the Company’s variable-rate borrowings and regularly enters into coffee futures contracts to hedge price-to-be-established coffee purchase commitments of green coffee with the objective of minimizing cost risk due to market fluctuations. The Company does not hold or issue derivative financial instruments for trading purposes.

The Company designates the swap agreements and coffee futures contracts as cash flow hedges and measures the effectiveness of these derivative instruments at each balance sheet date. The changes in the fair value of these instruments are classified in accumulated other comprehensive income (“OCI”). Gains and losses on these instruments are reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. If it is determined that a derivative is not highly effective, the gains and losses will be reclassified into earnings upon determination.


The Company has interest rate swap agreements with Bank of America N.A. and Sovereign Bank. During the thirteen and twenty-six weeks ended March 27, 2010, the Company paid $631,000 and $1,312,000, respectively, pursuant to the swap agreements, which increased interest expense.

The following table summarizes the interest rate swaps outstanding at March 27, 2010:

 

Hedged Transaction

   Notional Amount of
Underlying Debt
   Fixed Rate
Received
    Maturity    Fair Value of
Swap
 

30-day LIBOR

   $ 30,000,000    2.35   2010    $ (156,000

30-day LIBOR

   $ 19,800,000    5.44   2011    $ (1,094,000

30-day LIBOR

   $ 20,000,000    3.87   2013    $ (1,275,000
                    

Total

   $ 69,800,000         $ (2,525,000
                    

The following table summarizes the interest rate swaps outstanding at September 26, 2009:

 

  

Hedged Transaction

   Notional Amount of
Underlying Debt
   Fixed Rate
Received
    Maturity    Fair Value of
Swap
 

30-day LIBOR

   $ 30,000,000    2.35   2010    $ (438,000

30-day LIBOR

   $ 25,700,000    5.44   2011    $ (1,551,000

30-day LIBOR

   $ 20,000,000    3.87   2013    $ (1,268,000
                    

Total

   $ 75,700,000         $ (3,257,000
                    

The following table discloses the fair value of the Company’s financial instruments included in the Consolidated Balance Sheets:

Fair Value of Derivative Instruments (Gross of Tax)

 

     March 27,
2010
    September 26,
2009
    Balance  Sheet
Classification

Coffee Futures

   $ —        $ 90,000      Other current assets

Interest Rate Swaps

   $ (2,525,000   $ (3,257,000   Other short-term liabilities
                  

Total

   $ (2,525,000   $ (3,167,000  
                  


The following tables disclose the effect of the Company’s financial instruments included in the Consolidated Statement of Operations:

 

Effect of Derivatives Instruments on Earnings (Gross of Tax)

for the thirteen weeks ended March 27, 2010

 

  

  

     Amount of
Gain or (Loss)
in OCI
    Location of
Gain or (Loss)
Reclassified from
OCI into Income
   Amount of Gain
or (Loss)
Reclassified
from OCI into
Income
 

Coffee Futures

   $ —        Cost of Sales    $ 124,000   

Interest Rate Swaps

   $ 319,000      Interest Expense    $ —     
                   

Total Derivatives

   $ 319,000         $ 124,000   
                   

Effect of Derivatives Instruments on Earnings (Gross of Tax)

for the thirteen weeks ended March 28, 2009

 

  

  

     Amount of
Gain or (Loss)
in OCI
    Location of
Gain or (Loss)
Reclassified from
OCI into Income
   Amount of Gain
or (Loss)
Reclassified
from OCI into
Income
 

Coffee Futures

   $ 119,000      Cost of Sales    $ (132,000

Interest Rate Swaps

   $ 95,000      Interest Expense    $ —     
                   

Total Derivatives

   $ 214,000         $ (132,000
                   

Effect of Derivatives Instruments on Earnings (Gross of Tax)

for the twenty-six weeks ended March 27, 2010

 

  

  

     Amount of
Gain or (Loss)
in OCI
    Location of
Gain or (Loss)
Reclassified from
OCI into Income
   Amount of Gain
or (Loss)
Reclassified
from OCI into
Income
 

Coffee Futures

   $ 66,000      Cost of Sales    $ 188,000   

Interest Rate Swaps

   $ 732,000      Interest Expense    $ —     
                   

Total Derivatives

   $ 798,000         $ 188,000   
                   

Effect of Derivatives Instruments on Earnings (Gross of Tax)

for the twenty-six weeks ended March 28, 2009

 

  

  

     Amount of
Gain or (Loss)
in OCI
    Location of
Gain or (Loss)
Reclassified from
OCI into Income
   Amount of Gain
or (Loss)
Reclassified
from OCI into
Income
 

Coffee Futures

   $ (186,000   Cost of Sales    $ (145,000

Interest Rate Swaps

   $ (3,676,000   Interest Expense    $ —     
                   

Total Derivatives

   $ (3,862,000      $ (145,000
                   

The Company estimates the deferred gains (losses) of coffee futures will be reclassified to net income within the next nine months, which is consistent with the period over which the Company hedges its exposure to the variability in future cash flows. The Company hedges a portion of its exposure to the variability in interest rates through the maturity date of its credit facility.

The Company is exposed to credit loss in the event of nonperformance by the other parties to these financial instruments, however nonperformance is not anticipated.


9. 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, for identical or similar assets and liabilities in active or non-active markets

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 discloses the level used by fair value measurements at March 27, 2010:

 

     Fair Value Measurements Using    Balance Sheet
Classification
     Level 1    Level 2     Level 3   

Derivatives

   $ —      $ (2,525,000   $ —      Other short-term liabilities
                        

Total

   $ —      $ (2,525,000   $ —     
                        

The following table discloses the level used by fair value measurements at September 26, 2009:

 

     Fair Value Measurements Using    Balance Sheet
Classification
Level 1
     Level 1    Level 2     Level 3   

Short-term Investment

   $ —      $ 50,000,000      $ —      Short-term investments

Derivatives

   $ —      $ 90,000      $ —      Other current assets

Derivatives

   $ —      $ (3,257,000   $ —      Other short-term liabilities
                        

Total

   $ —      $ 46,833,000      $ —     
                        

Derivative financial instruments include coffee futures contracts and interest rate swap agreements. Short-term investments include certificates of deposit. To determine fair value, the Company utilizes the market approach valuation technique for the coffee futures contracts and certificates of deposit and the income approach for the interest rate swap agreements. The Company uses Level 2 inputs that are based on market data of identical (or similar) instruments that are in observable markets. All derivatives on the balance sheet are recorded at fair value with changes in fair value recorded in other comprehensive income for temporary valuation adjustments and in the statement of operations for settlement of contracts.


10. 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
March 27,
2010
   Thirteen
weeks ended
March 28,
2009
   Twenty-six
weeks ended
March 27,
2010
   Twenty-six
weeks ended
March 28,
2009

Numerator - basic and diluted earnings per share:

           

Net income

   $ 24,702    $ 12,983    $ 37,196    $ 27,367
                           

Denominator:

           

Basic earnings per share - weighted average shares outstanding

     43,754,546      37,125,038      43,705,417      36,902,634

Effect of dilutive securities - stock options

     2,189,312      1,895,020      2,170,715      1,921,473
                           

Diluted earnings per share - weighted average shares outstanding

     45,943,858      39,020,058      45,876,132      38,824,107
                           

Basic earnings per share

   $ 0.56    $ 0.35    $ 0.85    $ 0.74

Diluted earnings per share

   $ 0.54    $ 0.33    $ 0.81    $ 0.70

For the thirteen and twenty-six weeks ended March 27, 2010 options to purchase 51,000 and 27,000 shares of common stock, respectively, were excluded from the calculation of diluted earnings per share because they were antidilutive.

For the thirteen and twenty-six weeks ended March 28, 2009, options to purchase 692,000 and 788,000 shares of common stock, respectively, were excluded in the calculation of diluted earnings per share because they were antidilutive.

 

11. Compensation Plans

Stock Option Plans

The grant-date fair value of employee stock options and similar instruments is estimated using the Black-Scholes option-pricing model with the following assumptions for grants issued in the twenty-six weeks ended March 27, 2010: an expected life averaging 6 years; an average volatility of 53%; no dividend yield; and a risk-free interest rate averaging 2.8%. The weighted-average fair value of options granted during the twenty-six weeks ended March 27, 2010 was $47.65 per share.

For grants issued in the twenty-six weeks ended March 28, 2009, the following assumptions were used: an expected life averaging 6 years; an average volatility of 52%; no dividend yield; and a risk-free interest rate averaging 2.0%. The weighted-average fair value of options granted during the twenty-six ended March 28, 2009 was $13.53 per share.

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 in the twenty-six weeks ended March 27, 2010: an expected life averaging 6 months; an average volatility of 57%; no dividend yield; and a risk-free interest rate averaging 0.2%. The weighted-average fair values of purchase rights granted during the twenty-six weeks ended March 27, 2010 was $22.75 per share.

For the purchase rights granted in the twenty-six weeks ended March 28, 2009, the following assumptions were used: an expected life averaging 6 months; an average volatility of 59%; no dividend yield; and a risk-free interest rate averaging 1.5%. The weighted-average fair values of purchase rights granted during the twenty-six weeks ended March 28, 2009 was $8.03 per share.


For the thirteen and twenty-six weeks ended March 27, 2010, income before income taxes was reduced by a stock compensation expense of $1,920,000 and $3,848,000 (gross of tax), respectively.

For the thirteen and twenty-six weeks ended March 28, 2009, income before income taxes was reduced by a stock compensation expense of $1,526,000 and $2,956,000 (gross of tax), respectively.

Employee Stock Ownership Plan

The Company maintains an Employee Stock Ownership Plan (the “ESOP”). The ESOP is qualified under sections 401(a) and 4975(e)(7) of the Internal Revenue Code. In the twenty-six week periods ended March 27, 2010 and March 28, 2009, the Company recorded compensation costs of $623,000 and $118,000 to accrue for anticipated stock distributions under the ESOP, respectively. On March 27, 2010, the ESOP held 12,687 unearned shares at an average cost of $6.03.

Deferred Compensation Plan

The Company also maintains a Deferred Compensation Plan, which is not subject to the qualification requirements of Section 401(a) of the Internal Revenue Code and which allows participants to defer compensation until a future date. Only non-employee directors and certain highly compensated employees of the Company selected by the Company’s board of directors are eligible to participate in the Plan. In the twenty-six week periods ended March 27, 2010 and March 28, 2009, $78,000 and $70,500 of compensation expense was recorded under this Plan, respectively.

 

12. Income Taxes

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

The total amount of unrecognized tax benefits at March 27, 2010 and September 26, 2009 was $5,400,000 and $444,000, respectively. The Company is indemnified for up to $4,900,000 of the total reserved balance. There is a corresponding receivable in other long-term assets reflecting the entitlement to indemnification. The Company recognizes interest and penalties related to unrecognized tax benefits in the provision for income taxes.

The federal research and development tax credit expired on December 31, 2009. The Company has claimed a tax credit through December 31, 2009. In the event the legislature renews the tax credit, the Company will report an additional amount of federal tax credit as a discrete item in the quarter in which the credit is enacted. With this exception, the Company does not expect a significant change to the amount of unrecognized tax benefits within the next 12 months.

 

13. Patent Litigation Settlement

On October 23, 2008, Keurig entered into a Settlement and License Agreement with Kraft Foods, Inc., Kraft Foods Global, Inc., and Tassimo Corporation (collectively “Kraft”) providing for a complete settlement of Keurig’s previously filed lawsuit against Kraft. Pursuant to the terms of the Settlement and License Agreement, Kraft paid to Keurig a lump sum of $17,000,000 and Keurig grants to Kraft and its affiliates a limited, non-exclusive, perpetual, worldwide, fully paid up license of certain Keurig patents. The settlement is recorded as a non-recurring item in operating income in the first quarter of fiscal 2009.

 

14. Related Party Transactions

The Company uses travel services provided by Heritage Flight, a charter air services company owned by Mr. Stiller, the Company’s former CEO and current Chairman of the Board. During the twenty-six weeks ended March 27, 2010 and March 28, 2009, Heritage Flight billed the Company the amount of $164,000 and $73,000, respectively, for travel services to various employees of the Company.


15. Pending Acquisition

On December 7, 2009, the Company, and Pebbles Acquisition Sub, Inc., a wholly-owned subsidiary of the Company, entered into a definitive Agreement and Plan of Merger (the “Merger Agreement”) with Diedrich Coffee, Inc (“Diedrich”). The approval of the Merger Agreement by the Diedrich Board of Directors was concurrent with the termination of the Agreement and Plan of Merger dated as of November 2, 2009 between Diedrich and Peet’s Coffee & Tea, Inc. (“Peet’s”), in which the Company funded a termination advance of approximately $8,500,000 to Diedrich, who in turn paid the same amount to Peet’s pursuant to the terms of the Agreement and Plan of Merger between Diedrich and Peet’s. This payment is recorded in other current assets on the balance sheet and will be part of the Diedrich purchase price pending the consummation of the acquisition. The Merger Agreement contemplates the acquisition through purchase of all outstanding shares of Diedrich’s common stock at a purchase price of $35.00 per share in cash pursuant to a cash tender offer, with a total transaction value of approximately $290,000,000. This transaction is subject to customary closing conditions, including, among others, regulatory approvals. If the Merger Agreement is terminated in the event that regulatory approvals are not obtained under the terms and conditions of the merger agreement, the Company will be required to make termination payments of approximately $8,500,000 for a termination prior to February 15, 2010 and an additional $1,000,000 in each subsequent 60 day period through June 15, 2010. On May 3, 2010, the Company announced that it certified to the U.S. Federal Trade Commission (the “FTC”) that it had substantially complied with the FTC’s request for additional information under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (“Second Request”), in connection with the Company’s offer to purchase all of the outstanding shares of Diedrich common stock. Management expects full consummation of the acquisition to occur early in 2010.

 

16. Subsequent Events

On April 28, 2010 the Company announced that its Board of Directors has approved a three-for-one stock split effected in the form of a stock dividend of two additional shares of the Company’s common stock for every one issued share. The stock dividend will be distributed on May 17, 2010 to shareholders of record at the close of business on May 10, 2010.

The following table represents historical earnings per share on a pre-split basis as compared to pro forma earnings per share on a post-split basis.

 

     Thirteen
weeks ended
March 27, 2010
   Thirteen
weeks ended
March 28, 2009
   Twenty-six
weeks ended
March 27, 2010
   Twenty-six
weeks ended
March 28, 2009

Net income

   $ 24,702    $ 12,983    $ 37,196    $ 27,367
                           

Historical pre-split earning per share

           

Basic income per share:

           

Weighted average shares outstanding

     43,754,546      37,125,038      43,705,417      36,902,634

Net income

   $ 0.56    $ 0.35    $ 0.85    $ 0.74

Diluted income per share:

           

Weighted average shares outstanding

     45,943,858      39,020,058      45,876,132      38,824,107

Net income

   $ 0.54    $ 0.33    $ 0.81    $ 0.70

Pro forma post-split earnings per share

           

Basic income per share:

           

Pro forma weighted average shares outstanding

     131,263,638      111,375,114      131,116,251      110,707,902

Pro forma net income

   $ 0.19    $ 0.12    $ 0.28    $ 0.25

Diluted income per share:

           

Pro forma weighted average shares outstanding

     137,831,574      117,060,174      137,628,396      116,472,321

Pro forma net income

   $ 0.18    $ 0.11    $ 0.27    $ 0.23


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

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

Overview

We are a leader in the specialty coffee and the overall coffee maker business. We roast high-quality Arabica bean coffees and offer over 100 coffee selections, including single-origins, estates, certified organics, Fair Trade Certified TM , proprietary blends, and flavored coffees that sell under the Green Mountain Coffee ® , Newman’s Own ® Organics, Tully’s ® Coffee and, as of November 13, 2009, the Timothy’s ® World Coffee brands. We also sell cocoa, teas and coffees in K-Cup ® portion packs, Keurig ® single-cup brewers and other accessories. In recent years, a significant driver of the Company’s growth has been the sale of K-Cups and Keurig brewing systems.

Business Segments

The Company manages its operations through two operating segments, Specialty Coffee business unit (“SCBU”) and Keurig business unit (“Keurig”). We evaluate performance primarily based on segment income before taxes. Expenses not specifically related to either operating segment are recorded as “Corporate”.

SCBU sells whole bean and ground coffee, as well as K-Cup portion packs, and to a lesser extent, Keurig single-cup brewers and other accessories mainly in North American wholesale and retail channels, and directly to consumers. The majority of SCBU’s revenue is derived from its North American wholesale channels.

Keurig is a pioneer and leading manufacturer of gourmet single-cup brewing systems and targets its premium patented single-cup brewing systems for consumers at home (“AH”) and away-from-home (“AFH”) mainly in North America. Keurig sells its AH single-cup brewers to select retailers such as department stores and club stores and directly to consumers. It sells its AFH single-cup brewers to distributors for offices. Keurig also sells coffee, tea and cocoa in K-Cups produced by a variety of roasters, including SCBU, as well as related accessories to select retailers such as department stores and club stores and also directly to consumers. Keurig earns royalty income from K-Cups shipped by its licensed roasters.

Cost of sales for the Company consists of the cost of raw materials including coffee beans, cocoa, flavorings and packaging materials; a portion of our rental expense; the salaries and related expenses of production; distribution and merchandising personnel; depreciation on production equipment; the cost of brewers manufactured by suppliers, and freight, duties and delivery expenses. Selling and operating expenses consist of expenses that directly support sales, including media and advertising expenses; a portion of the rental expense; and the salaries and related expenses of employees directly supporting sales and marketing as well as research and development. General and administrative expenses consist of expenses incurred for corporate support and administration, including a portion of the rental expense and the salaries and related expenses of personnel not elsewhere categorized, and starting in fiscal 2010, include certain acquisition-related expenses.

Historically, SCBU and Keurig operating segments have not shared manufacturing or distribution facilities, except for brewer fulfillment at our Knoxville facility. Expenses not specifically related to either operating segment are shown separately as “Corporate”. Corporate expenses are comprised mainly of the compensation and other related expenses of the Company’s Chief Executive Officer, Chief Financial Officer, Chief Information Officer, Corporate General Counsel and Secretary, Vice President Human Resources, Vice President of Corporate Social Responsibility, Vice President of Environmental Affairs and other selected employees who perform duties related to our entire enterprise. Corporate expenses also include interest expense, certain corporate legal expenses and compensation of the board of directors. In addition, corporate expenses include, starting in fiscal 2010, acquisition-related costs, and in fiscal 2009, corporate expenses are offset by $17.0 million of proceeds received from a litigation settlement with Kraft. Corporate assets include cash and short-term investments.


Goodwill and intangibles related to the Frontier, Tully’s and Timothy’s acquisitions are included in the SCBU reporting unit of the Company. Keurig related goodwill and intangibles are included in the Keurig reporting unit of the Company.

Basis of Presentation

Included in this presentation are discussions and reconciliations of income before taxes, net income and diluted earnings per share in accordance with generally accepted accounting principles (“GAAP”) to income before taxes, net income and diluted earnings per share excluding certain expenses and losses, which we refer to as non-GAAP income before taxes, non-GAAP net income and non-GAAP diluted earnings per share. These non-GAAP measures exclude acquisition-related transaction expenses, one-time operating income related to the Company’s patent litigation settlement and the related legal expenses. These non-GAAP measures are not in accordance with, or an alternative to, GAAP. The Company’s management uses these non-GAAP measures in discussing and analyzing its results of operations because it believes the non-GAAP measures provide investors with greater transparency by helping to illustrate the underlying financial and business trends relating to the Company’s results of operations and financial condition and comparability between current and prior periods. Management uses the non-GAAP measures to establish and monitor budgets and operational goals and to evaluate the performance of the Company.

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

Acquisitions

On November 13, 2009, the Company, through Timothy’s Acquisition Corporation, a wholly-owned subsidiary of the Company, acquired all of the outstanding stock of Timothy’s Coffee of the World Inc. (“Timothy’s”), which included its brand and wholesale coffee business for an aggregate cash purchase price of approximately $155.7 million. The acquisition was financed using available cash on hand.

On December 7, 2009, the Company, and Pebbles Acquisition Sub, Inc., a wholly-owned subsidiary of the Company, entered into a definitive Agreement and Plan of Merger (the “Merger Agreement”) with Diedrich Coffee, Inc (“Diedrich”) for the acquisition of all of the outstanding capital stock of Diedrich at a purchase price of $35.00 per share in cash pursuant to a cash tender offer, with a total transaction value of approximately $290.0 million. This transaction is subject to customary closing conditions, including, among others, regulatory approvals.


Results of Operations

Summary financial data of the Company

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

 

     Thirteen
weeks ended
March 27,
2010
    Thirteen
weeks ended
March 28,
2009
    Twenty-six
weeks ended
March 27,
2010
    Twenty-six
weeks ended
March 28,
2009
 

Net sales

   100.0   100.0   100.0   100.0

Cost of sales

   66.6   67.9   68.8   70.5
                        

Gross profit

   33.4   32.1   31.2   29.5

Selling and operating expenses

   13.2   14.6   14.6   16.5

General and administrative expenses

   7.5   5.8   7.1   5.2

Patent litigation (settlement) expense

   0.0   0.0   0.0   (4.4 )% 
                        

Operating income

   12.7   11.7   9.5   12.2

Other expense

   0.0   (0.1 )%    0.0   (0.1 )% 

Interest expense

   (0.3 )%    (0.5 )%    (0.3 )%    (0.6 )% 
                        

Income before income taxes

   12.4   11.1   9.2   11.5

Income tax expense

   (4.8 )%    (4.3 )%    (3.7 )%    (4.5 )% 
                        

Net income

   7.6   6.8   5.5   7.0
                        

Segment Summary

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

 

     Net sales (in millions)  
     Thirteen
weeks ended
March 27,
2010
    Thirteen
weeks ended
March 28,
2009
    Twenty-six
weeks ended
March 27,
2010
    Twenty-six
weeks ended
March 28,
2009
 

SCBU

   $ 221.5      $ 113.3      $ 414.4      $ 219.1   

Keurig

   $ 212.3      $ 119.8      $ 466.8      $ 240.7   

Inter-company eliminations

   $ (108.9   $ (39.7   $ (206.9   $ (69.5
                                

Total Company

   $ 324.9      $ 193.4      $ 674.3      $ 390.3   
                                

 

     Income before taxes (in milliions)  
     Thirteen
weeks ended
March 27,
2010
    Thirteen
weeks ended
March 28,
2009
    Twenty-six
weeks ended
March 27,
2010
    Twenty-six
weeks ended
March 28,
2009
 

SCBU

   $ 30.5      $ 12.8      $ 59.2      $ 22.4   

Keurig

   $ 20.8      $ 13.5      $ 28.2      $ 15.0   

Corporate

   $ (10.9   $ (4.7   $ (22.0   $ 8.5   

Inter-company eliminations

   $ (0.2   $ (0.2   $ (3.2   $ (1.0
                                

Total Company

   $ 40.2      $ 21.4      $ 62.2      $ 44.9   
                                


Thirteen weeks ended March 27, 2010 versus thirteen weeks ended March 28, 2009

Revenue

Company Summary

Net sales for the second quarter of fiscal 2010 increased 68% to $324.9 million, up from $193.4 million reported in the second quarter of fiscal 2009 (“the prior year period”). The two primary drivers of the 68%, or $131.5 million, increase in the Company’s net sales were the 92%, or $98.0 million, increase in total K-Cup ® net sales and the 57%, or $23.5 million, increase in Keurig ® brewer and accessories sales. Approximately 86% of consolidated sales this past quarter were from the Keurig brewing system and its recurring K-Cup portion pack revenue.

SCBU

SCBU segment net sales increased by $62.4 million or 69%, to $153.6 million in the second quarter of fiscal 2010 as compared to $91.2 million in the prior year period. Net sales related to the Timothy’s brand represented approximately 21 percentage points of the 69% increase in SCBU’s net sales, and 10 percentage points of the 68% increase in the Company’s total sales. Fair Trade Certified™ coffees represented approximately 28% percent of coffee pounds shipped this quarter.

Keurig

Keurig segment net sales increased by $69.1 million, or 68%, to $171.3 million in the second quarter of fiscal 2010 as compared to $102.2 million reported in the prior year period, with approximately two-thirds of the increase driven by K-Cup sales to retailers and consumers.

During the second quarter of fiscal 2010, K-Cup portion packs shipped system-wide by all Keurig licensed roasters was 720 million, an increase of 67% over the prior year period. Additionally, there were 731,000 system-wide brewers with Keurig-branded brewing technology shipped during the second quarter of fiscal 2010 as compared to 486,000 shipped during the prior year period.

Gross Profit

Company gross profit for the second quarter of fiscal 2010 totaled $108.7 million, or 33.4% of net sales, as compared to $62.0 million, or 32.1% of net sales, in the prior year period. The improvement was driven by the higher manufacturing gross margin derived from the increase in volume of the Company’s manufactured K-Cups as a percentage of total system volume. Offsetting the higher manufacturing gross margin was an increase in warranty expense and sales returns of certain reservoir brewers during the second quarter. The quality issue, which occurred in some brewers, did not represent a safety concern and is believed to be tied to a component used in limited production runs from late 2009. The Company is replacing any brewers exhibiting this quality issue and has implemented hardware and software changes which it believes have corrected the issue, however, there can be no assurance that we will not experience some additional warranty expense related to this quality issue in future periods. The gross profit margin was reduced by approximately 2.0 to 2.5 percentage points due to the higher than normal warranty expense and sales returns.


Selling, General and Administrative Expenses

Selling, general and administrative expenses (S,G&A) as a percentage of net sales for the second quarter were 20.8% as compared to 20.4% in the prior year.

For the second quarter of fiscal 2010, general and administrative expenses include $5.0 million acquisition-related expenses related to the pending acquisition of Diedrich Coffee, Inc. (“Diedrich”) as well as the amortization of identifiable intangibles of $1.9 million due to the Company’s recent acquisitions.

Interest Expense

Company interest expense was $0.8 million in the second quarter of fiscal 2010, as compared to $1.0 million in the prior year period.

Income before taxes

Company income before taxes was $40.2 million in the second quarter of fiscal 2010, as compared to $21.4 million in the prior year period, and, as a percentage of net sales, 12.4% and 11.1%, respectively.

Excluding the impact of the $5.0 million acquisition-related expenses related to the pending acquisition of Diedrich in the second quarter of fiscal 2010, the Company’s non-GAAP income before taxes was $45.2 million, or 13.9% of net sales as compared to $21.4 million, or 11.1% of net sales in the prior year period.

The SCBU segment contributed $30.5 million in income before taxes in the second quarter of fiscal 2010, up from $12.8 million in the prior year period.

The Keurig segment contributed $20.8 million in income before taxes in the second quarter of fiscal 2010, up from $13.5 million in the prior year period.

The Corporate segment accounted for a reduction of $(10.9) million in income before taxes in the second quarter of fiscal 2010, as compared to a reduction of $(4.8) million in the prior year period.

Taxes

The effective income tax rate for the Company was 38.6% in the second quarter of fiscal 2010, as compared to 39.2% in the prior year period.

Net Income and Diluted EPS

Company net income in the second quarter of fiscal 2010 was $24.7 million, as compared to $13.0 million in the prior year period. Non-GAAP net income for the second quarter of fiscal 2010 was $27.8 million, which excludes the impact of the $5.0 million acquisition-related expenses, which is an increase of $14.8 million or 114%, as compared to $13.0 million in the prior year period.

Company diluted EPS was $0.54 in the second quarter of fiscal 2010, as compared to $0.33 per share in the prior year period. Non-GAAP diluted EPS was $0.60 in the second quarter of fiscal 2010, as compared to $0.33 per share in the prior year period.

The following tables show a reconciliation of net income and diluted EPS to non-GAAP net income and non-GAAP EPS for the thirteen weeks ended March 27, 2010 and March 28, 2009 (in thousands):


     Thirteen weeks ended March 27, 2010  
     GAAP     Acquisition-related
Transaction
Expenses
   Acquisition-related
Transaction
Expenses
    Patent
Litigation
Settlement
   Non-GAAP  
       Timothy’s Coffees
of the World Inc.
   Diedrich
Coffee, Inc.
      

Net Sales

   $ 324,915        —        —          —      $ 324,915   

Cost of Sales

     216,263        —        —          —        216,263   
                                      

Gross Profit

     108,652        —        —          —        108,652   

Selling and operating expenses

     42,979        —        —          —        42,979   

General and administrative expenses

     24,464        —        (5,000     —        19,464   
                                      

Operating income

     41,209        —        5,000        —        46,209   

Other expense

     (133     —        —          —        (133

Interest expense

     (833     —        —          —        (833
                                      

Income before income taxes

     40,243        —        5,000        —        45,243   

Income tax expense

     (15,541     —        (1,930     —        (17,471
                                      

Net income

   $ 24,702      $ —      $ 3,070      $ —      $ 27,772   
                                      

Basic income per share:

            

Weighted average shares outstanding

     43,754,546        43,754,546      43,754,546        43,754,546      43,754,546   

Net income

   $ 0.56      $ —      $ 0.07      $ —      $ 0.63   

Diluted income per share:

            

Weighted average shares outstanding

     45,943,858        45,943,858      45,943,858        45,943,858      45,943,858   

Net income

   $ 0.54      $ —      $ 0.06      $ —      $ 0.60   

 

     
     Thirteen weeks ended March 28, 2009  
     GAAP     Acquisition-related
Transaction
Expenses
   Acquisition-related
Transaction
Expenses
   Patent
Litigation
Settlement
   Non-GAAP  
       Timothy’s Coffees
of the World Inc.
   Diedrich Coffee,
Inc.
     

Net Sales

   $ 193,351        —        —        —      $ 193,351   

Cost of Sales

     131,370        —        —        —        131,370   
                                     

Gross Profit

     61,981        —        —        —        61,982   

Selling and operating expenses

     28,094        —        —        —        28,094   

General and administrative expenses

     11,245        —        —        —        11,245   
                                     

Operating income

     22,642        —        —        —        22,642   

Other expense

     (242     —        —        —        (242

Interest expense

     (1,032     —        —        —        (1,032
                                     

Income before income taxes

     21,368        —        —        —        21,368   

Income tax expense

     (8,385     —        —        —        (8,385
                                     

Net income

   $ 12,983      $ —      $ —      $ —      $ 12,983   
                                     

Basic income per share:

             

Weighted average shares outstanding

     37,125,038        37,125,038      37,125,038      37,125,038      37,125,038   

Net income

   $ 0.35      $ —      $ —      $ —      $ 0.35   

Diluted income per share:

             

Weighted average shares outstanding

     39,020,058        39,020,058      39,020,058      39,020,058      39,020,058   

Net income

   $ 0.33      $ —      $ —      $ —      $ 0.33   


Twenty-six weeks ended March 27, 2010 versus twenty-six weeks ended March 28, 2009

Revenue

Company Summary

Net sales for the twenty-six weeks ended March 27, 2010 (the “2010 YTD period”) increased 73%, to $674.3 million, up from $390.3 million reported for the twenty-six weeks ended March 28, 2009 (the “prior YTD period”). The two primary drivers of the 73%, or $284.0 million, increase in the Company’s net sales were the 98%, or $185.8 million, increase in total K-Cup net sales and the 76%, or $80.5 million, increase in Keurig brewer and accessories sales. Approximately 87% of consolidated sales for the 2010 YTD period were from the Keurig brewing system and its recurring K-cup portion pack revenue.

SCBU

SCBU segment net sales increased to $285.2 million, or 56%, in the 2010 YTD period compared to $182.8 million reported in the prior YTD period. Net sales related to the Timothy’s brand, which are included in the Company’s results for the first time beginning November 13, 2009, represented approximately 14 percentage points of the 56% increase in SCBU’s net sales, and 7 percentage points of the 73% increase in the Company’s total sales. Fair Trade Certified™ coffees represented approximately 29% percent of coffee pounds shipped during the 2010 YTD period.

Keurig

Keurig segment net sales increased to $389.1 million, or 88%, in the 2010 YTD period as compared to $207.5 million reported in the prior YTD period. The increase in Keurig segment net sales was primarily due to higher K-Cup sales of approximately $102.3 million which increased 119% over the prior YTD period as well as an increase in brewer and accessories sales of approximately $77.8 million or 78% over the prior YTD period.

During the 2010 YTD period, K-Cup portion packs shipped system-wide by all Keurig licensed roasters was 1.4 billion, an increase of 74% over the prior YTD period. Additionally, there were 2,197,000 system-wide brewers with Keurig-branded brewing technology shipped during the 2010 YTD period as compared to 1,196,000 shipped during the prior YTD period.

Gross Profit

Company gross profit for the 2010 YTD period totaled $210.5 million, or 31.2% of net sales, as compared to $115.3 million, or 29.5% of net sales, in the prior YTD period. The improvement was driven by the higher manufacturing gross margin derived from the increase in volume of the Company’s manufactured K-Cups as a percentage of total system volume. Offsetting the higher manufacturing gross margin was an increase in warranty expense and sales returns of certain reservoir brewers during the second quarter, as discussed above. The gross profit margin was reduced by approximately 1.0 to 1.2 percentage points due to higher than normal warranty expense and sales returns and there can be no assurance that we will not experience some additional warranty expense related to this quality issue in future periods.

Selling, General and Administrative Expenses

Selling, general and administrative expenses (S,G&A) as a percentage of net sales remained the same in the 2010 YTD period when compared with the prior YTD period at 21.7%.

For the 2010 YTD period, general and administrative expenses include $8.0 million acquisition-related expenses related to the pending acquisition of Diedrich, $2.0 million acquisition related expenses related to the completed Timothy’s acquisition, as well as the amortization of identifiable intangibles of $3.0 million due to the Company’s recent acquisitions.


Patent Litigation Settlement

On October 23, 2008, Keurig entered into a Settlement and License Agreement with Kraft Foods, Inc., Kraft Foods Global, Inc., and Tassimo Corporation (collectively “Kraft”) providing for a complete settlement of Keurig’s previously filed lawsuit against Kraft during the first quarter of fiscal 2009. Accordingly, the Company recognized the receipt of a patent litigation settlement of $17.0 million as a non-recurring item included in operating income for the Company’s first quarter of fiscal 2009.

Interest Expense

Company interest expense decreased to $1.9 million in the 2010 YTD period, down from $2.4 million in the prior YTD period, due to a decrease in the Company’s average borrowing base.

Income before taxes

Company income before taxes increased to $62.2 million in the 2010 YTD period, up from $44.9 million in the prior YTD period, and, as a percentage of net sales, 9.2% and 11.5%, respectively. The prior year period included the $17.0 million (pretax) patent litigation settlement as described above. Excluding the patent litigation income, income before taxes increased by 123%, or $34.3 million, in the 2010 YTD period, up from $27.9 million in the prior YTD period.

Excluding the impact of the one time acquisition related expenses of $10.0 million in the 2010 YTD period as well as the patent litigation income of $17.0 million in the prior YTD period, non-GAAP income before taxes increased 159% to $72.2 million in the 2010 YTD period from $27.9 million in the prior YTD period.

The SCBU segment contributed $59.1 million in income before taxes in the 2010 YTD period, up from $22.4 million in the prior YTD period.

The Keurig segment contributed $28.2 million in income before taxes in the 2010 YTD period, up from $15.0 million in the prior YTD period.

The Corporate segment accounted for a reduction of $(22.0) million before taxes in the 2010 YTD period, as compared to income of $8.6 million in the prior YTD period due to the settlement of the patent litigation in the first quarter of fiscal 2009.

Taxes

The effective income tax rate for the Company was 40.2% in the 2010 YTD period, as compared to 39.1% in the prior YTD period. The increase was primarily due to a portion of the acquisition-related expenses not being deductible for tax purposes.

Net Income and Diluted EPS

Company net income in the 2010 YTD period was $37.2 million, up 36% from $27.4 million in the prior YTD period. Non-GAAP net income for 2010 YTD period was $44.0 million, an increase of $27.0 million or 159%, as compared the prior YTD period.

Company diluted EPS increased $0.11 to $0.81 per share in the 2010 YTD period, as compared to $0.70 per share in the prior YTD period. Non-GAAP diluted EPS was $0.96 in the 2010 YTD period, as compared to $0.44 per share in the prior YTD period.


The following tables show a reconciliation of net income and diluted EPS to non-GAAP net income and non-GAAP EPS (in thousands):

 

     Twenty-six weeks ended March 27, 2010  
     GAAP     Acquisition-related
Transaction
Expenses
    Acquisition-related
Transaction
Expenses
    Patent Litigation
Settlement
    Non-GAAP  
       Timothy’s Coffees
of the World Inc.
    Diedrich Coffee,
Inc.
     

Net Sales

   $ 674,278        —          —          —        $ 674,278   

Cost of Sales

     463,801        —          —          —          463,801   
                                        

Gross Profit

     210,477        —          —          —          210,477   

Selling and operating expenses

     98,558        —          —          —          98,558   

General and administrative expenses

     47,636        (2,000     (8,000     —          37,636   
                                        

Operating income

     64,283        2,000        8,000        —          74,283   

Other expense

     (244     —          —          —          (244

Interest expense

     (1,881     —          —          —          (1,881
                                        

Income before income taxes

     62,158        2,000        8,000        —          72,158   

Income tax expense

     (24,962     —          (3,216     —          (28,178
                                        

Net income

   $ 37,196      $ 2,000      $ 4,784      $ —        $ 43,980   
                                        

Basic income per share:

          

Weighted average shares outstanding

     43,705,417        43,705,417        43,705,417        43,705,417        43,705,417   

Net income

   $ 0.85      $ 0.05      $ 0.11      $ —        $ 1.01   

Diluted income per share:

          

Weighted average shares outstanding

     45,876,132        45,876,132        45,876,132        45,876,132        45,876,132   

Net income

   $ 0.81      $ 0.04      $ 0.11      $ —        $ 0.96   
     Twenty-six weeks ended March 28, 2009  
     GAAP     Acquisition-related
Transaction
Expenses
    Acquisition-related
Transaction
Expenses
    Patent Litigation
Settlement
    Non-GAAP  
       Timothy’s Coffees
of the World Inc.
    Diedrich Coffee,
Inc.
     

Net Sales

   $ 390,331        —          —          —        $ 390,331   

Cost of Sales

     275,000        —          —          —          275,000   
                                        

Gross Profit

     115,331        —          —          —          115,331   

Selling and operating expenses

     64,275        —          —          —          64,275   

General and administrative expenses

     20,456        —          —          —          20,456   

Patent litigation settlement

     (17,000     —          —          17,000        —     
                                        

Operating income

     47,600        —          —          (17,000     30,600   

Other expense

     (285     —          —          —          (285

Interest expense

     (2,414     —          —          —          (2,414
                                        

Income before income taxes

     44,901        —          —          (17,000     27,901   

Income tax expense

     (17,534     —          —          6,639        (10,895
                                        

Net income

   $ 27,367      $ —        $ —        $ (10,361   $ 17,006   
                                        

Basic income per share:

          

Weighted average shares outstanding

     36,902,634        36,902,634        36,902,634        36,902,634        36,902,634   

Net income

   $ 0.74      $ —        $ —        $ (0.28   $ 0. 46   

Diluted income per share:

          

Weighted average shares outstanding

     38,824,107        38,824,107        38,824,107        38,824,107        38,824,107   

Net income

   $ 0.70      $ —        $ —        $ (0.26   $ 0.44   


Liquidity and Capital Resources

Our working capital decreased to $278.4 million at March 27, 2010, from $413.7 million at September 26, 2009. The decrease is mostly attributed to the acquisition of Timothy’s which was completed on November 13, 2009 at a cash purchase price of approximately $154.2 million. In addition, working capital was also affected by an increase in receivables of $36.6 million and a decrease in inventory of $27.4 million.

Net cash provided by operating activities was $65.5 million in the 2010 YTD period as compared to $53.0 million in the prior YTD period. The increase in operating cash flow was primarily due to the decrease in inventory.

Cash flows from investing activities included capital expenditures of $53.2 million in the 2010 YTD period, as compared to $14.5 million in the prior YTD period. Additionally, cash flows from investing activities in the 2010 YTD period included $154.2 million for the acquisition of Timothy’s. The total acquisition price was approximately $155.7 million, of which $1.5 million consisted of non-cash liabilities assumed by the Company.

In the 2010 YTD period, cash flows from financing activities included $3.6 million generated from the exercise of employee stock options and the issuance of shares under the employee stock purchase plan, a decrease from $4.4 million in the prior YTD period. In addition, cash flows from operating and financing activities included a $4.5 million tax benefit from the exercise of non-qualified options and disqualifying dispositions of incentive stock options, a decrease from $5.4 million in the prior year period. As stock options we have granted are exercised, we will continue to receive proceeds and a tax deduction where applicable; however, we cannot predict either the amounts or the timing of any such proceeds or tax benefits.

Our Company maintains a $275.0 million Revolving Credit Agreement (“Credit Facility”) with Bank of America, N.A., and other lenders. At March 27, 2010, $72.7 million was outstanding under the Credit Facility as compared to $78.0 million at September 26, 2009.

We are party to interest rate swap agreements with Bank of America N.A. (“Bank of America”) and Sovereign Bank. The total notional amount of the swap agreements at March 27, 2010 and September 26, 2009 was $69.8 million and $75.7 million respectively. The swap agreements terminate between June 2010 and December 2012. At March 27, 2010 and September 26, 2009, we estimate that we would have paid $2.5 million and $3.3 million (gross of tax), respectively, had we terminated our swap agreements. We designate the swap agreements as a cash flow hedges and the changes in the fair value of the swaps are classified in accumulated other comprehensive income.


The credit facility is subject to the following financial covenants: a funded debt to adjusted EBITDA ratio and a fixed charge coverage ratio. We were in compliance with these covenants at March 27, 2010.

We expect to spend between $105.0 million and $125.0 million in capital expenditures in fiscal 2010. Capital expenditures are anticipated to be funded from operating cash flows and availability under our credit facility.

On December 7, 2009, we entered into a definitive Agreement and Plan of Merger (the “Agreement”) with Diedrich Coffee, Inc. (“Diedrich”). The approval of this Agreement, by the Diedrich Board of Directors, was concurrent with the termination of the Agreement and Plan of Merger dated as of November 2, 2009 between Diedrich and Peet’s Coffee & Tea, Inc. (“Peet’s), in which we funded a termination advance of approximately $8.5 million to Diedrich, who in turn paid the same amount to Peet’s pursuant to the terms of the Agreement and Plan of Merger between Diedrich and Peet’s. In this acquisition, we will purchase all of Diedrich’s outstanding common stock at a purchase price of $35.00 per share in cash pursuant to a cash tender offer. The purchase price of this acquisition will be approximately $290.0 million. Management intends to finance the $290.0 million total transaction price of its anticipated acquisition of Diedrich using cash on hand and our borrowings.

We may increase our borrowings or seek to amend our credit facility to finance our growth. The availability and terms of any such financing would be subject to prevailing market conditions and other factors at that time and there can be no assurance that we will be able to secure financing on terms as favorable as our existing facility.

We believe that our cash flows from operating activities, existing cash and our credit facility will provide sufficient liquidity to pay all liabilities in the normal course of business, fund anticipated capital expenditures and service debt requirements through the next 12 months. However, several risks and uncertainties could cause us to need to raise additional capital through equity and/or debt financing. We also may consider from time to time engaging in stock buyback plans or programs.


A summary of cash requirements related to our outstanding long-term debt, future minimum lease payments and inventory purchase commitments is as follows:

 

Fiscal Year

   Long-Term
Debt (1)
   Operating Lease
Obligations
   Purchase
Obligations
   Total

2010

   $ 5,035,000    $ 3,214,000    $ 292,003,000    $ 300,252,000

2011

     5,053,000      6,842,000      121,642,000    $ 133,537,000

2012

     5,053,000      6,045,000      65,488,000    $ 76,586,000

2013

     57,550,000      4,791,000      —      $ 62,341,000

2014

     14,000      4,591,000      —      $ 4,605,000

Thereafter

     —        7,677,000      —      $ 7,677,000
                           

Total

   $ 72,705,000    $ 33,160,000    $ 479,133,000    $ 584,998,000
                           

 

(1) Fiscal 2010 through fiscal 2012 long-term debt obligations are comprised of capital lease obligations and amortizing loan payments for the term loan.

Factors Affecting Quarterly Performance

Historically, the Company has experienced variations in sales and earnings from quarter to quarter due to the holiday season and a variety of other factors, including, but not limited to, general economic trends, the cost of green coffee, competition, marketing programs, weather and special or unusual events. Because of the seasonality of our business, results for any quarter are not necessarily indicative of the results that may be achieved for the full fiscal year.


Forward-Looking Statements

Certain statements contained herein are not based on historical fact and are “forward-looking statements” within the meaning of the applicable securities laws and regulations. Generally, these statements can be identified by the use of words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “feel,” “forecast,” “intend,” “may,” “plan,” “potential,” “project,” “should,” “would,” and similar expressions intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Owing to the uncertainties inherent in forward-looking statements, actual results could differ materially from those stated here. Factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, the impact on sales and profitability of consumer sentiment in this difficult economic environment, the Company’s success in efficiently expanding operations and capacity to meet growth, the Company’s success in efficiently and effectively integrating Tully’s and Timothy’s wholesale operations and capacity into its Specialty Coffee business unit, the Company’s success in introducing and producing new product offerings, the ability of lenders to honor their commitments under the Company’s credit facility, competition and other business conditions in the coffee industry and food industry in general, fluctuations in availability and cost of high-quality green coffee, any other increases in costs including fuel, Keurig’s ability to continue to grow and build profits with its roaster partners in the At Home and Away from Home businesses, the impact of the loss of major customers for the Company or reduction in the volume of purchases by major customers, delays in the timing of adding new locations with existing customers, the successful completion of the acquisition of Diedrich and subsequent integration, the Company’s level of success in continuing to attract new customers, sales mix variances, weather and special or unusual events, as well as other risks described more fully in the Company’s Annual Report on Form 10-K filed with the SEC on November 25, 2009. Forward-looking statements reflect management’s analysis as of the date of this filing. The Company does not undertake to revise these statements to reflect subsequent developments, other than in its regular, quarterly earnings releases.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risks relating to our operations result primarily from changes in interest rates and the commodity “c” price of coffee (the price per pound quoted by the Coffee, Sugar and Cocoa Exchange). To address these risks, we enter into hedging transactions as described below. We do not use financial instruments for trading purposes.

For purposes of specific risk analysis, we use sensitivity analysis to determine the impacts that market risk exposures may have on our financial position or earnings.

Interest rate risks

The table below provides information about our debt obligations that are sensitive to changes in interest rates. The table presents principal cash flows and related weighted average interest rates by expected maturity dates.

 

     Expected maturity date  
     2010     2011     2012     2013     2014     Total  

Long-term debt:

            

Variable rate (in thousands)

   $ 1,250      $ —        $ —        $ 1,450      $ —        $ 2,700   

Average interest rate

     5.8     —          —          1.0     —          6.8

Fixed rate (in thousands)

   $ 3,784      $ 5,053      $ 5,053      $ 56,100      $ 14      $ 70,004   

Average interest rate

     7.1     7.1     7.1     6.0     0.0     6.1

At March 27, 2010 we had $2.7 million outstanding under our Credit Facility subject to variable interest rates. Should interest rates (LIBOR and Prime rates) increase by 100 basis points, we would incur additional interest expense of $27,000 annually. At September 26, 2009 we had $2.3 million subject to variable interest rates. As discussed further under the heading “Liquidity and Capital Resources” the Company is party to interest rate swap agreements.


On March 27, 2010, the effect of our interest rate swap agreements was to limit the interest rate exposure on the outstanding balance of the Credit Facility to a fixed rate versus the 30-day Libor rate as follows: 5.4% on $19.8 million; 2.4% on $30 million; and 3.9% on $20 million. The total notional amount covered by these swaps will decrease progressively in future periods and terminates on various dates from June 2010 through December 2012.

Commodity price risks

The “c” price of coffee is subject to substantial price fluctuations caused by multiple factors, including weather and political and economic conditions in coffee-producing countries. Our gross profit margins can be significantly impacted by changes in the “c” price of coffee. We enter into fixed coffee purchase commitments in an attempt to secure an adequate supply of coffee. These agreements are tied to specific market prices (defined by both the origin of the coffee and the time of delivery) but we have significant flexibility in selecting the date of the market price to be used in each contract. We generally fix the price of our coffee contracts three to nine months prior to delivery, so that we can adjust our sales prices to the market. At March 27, 2010, the Company had approximately $133.8 million in green coffee purchase commitments, of which approximately 58% had a fixed price. At September 26, 2009, the Company had approximately $90.8 million in green coffee purchase commitments, of which approximately 46% had a fixed price.

In addition, we regularly use commodity-based financial instruments to hedge price-to-be-established coffee purchase commitments with the objective of minimizing cost risk due to market fluctuations. These hedges generally qualify as cash flow hedges. Gains and losses are deferred in other comprehensive income until the hedged inventory sale is recognized in earnings, at which point they are added to cost of sales. At March 27, 2010, we did not have any outstanding futures contracts. At September 26, 2009, we held outstanding futures contracts covering 1,125,000 pounds of coffee with a fair market value of $90,000, gross of tax.


Item 4. Controls and Procedures

As of March 27, 2010, the Company’s management with the participation of its Chief Executive Officer and Chief Financial Officer conducted an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-15 and 15d-15 under the Securities Exchange Act of 1934 (the “Exchange Act”). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures (as defined in Rule 13a-15 of the Exchange Act) are effective.

There have been no changes in the Company’s internal control over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II. Other Information

 

Item 1A. Risk Factors.

There have been no material changes from the risk factors disclosed in our fiscal 2009 Form 10-K.

 

Item 6. Exhibits

(a) Exhibits:

 

31.1    Principal Executive Officer Certification Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as Adopted Pursuant to the Section 302 of the Sarbanes-Oxley Act of 2002.
31.2    Principal Financial Officer Certification Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as Adopted Pursuant to the Section 302 of the Sarbanes-Oxley Act of 2002.
32.1    Principal Executive Officer Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2    Principal Financial Officer Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

* Management contract or compensatory plan.


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

    GREEN MOUNTAIN COFFEE ROASTERS, INC.

Date: 05/06/2010

    By:  

/s/ Lawrence J. Blanford

      Lawrence J. Blanford,
      President and Chief Executive Officer

Date: 05/06/2010

    By  

/s/ Frances G. Rathke

      Frances G. Rathke,
      Chief Financial Officer

Exhibit 31.1

CERTIFICATION PURSUANT TO

SECURITIES EXCHANGE ACT RULES 13a-14 and 15d-14

AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Lawrence J. Blanford, Chief Executive Officer, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Green Mountain Coffee Roasters, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: May 6, 2010

/s/ Lawrence J. Blanford

Lawrence J. Blanford
President and Chief Executive Officer

Exhibit 31.2

CERTIFICATION PURSUANT TO

SECURITIES EXCHANGE ACT RULES 13a-14 and 15d-14

AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Frances G. Rathke, Chief Financial Officer, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Green Mountain Coffee Roasters, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: May 6, 2010

/s/ Frances G. Rathke

Frances G. Rathke
Chief Financial Officer

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Green Mountain Coffee Roasters, Inc. (the “Company”) on Form 10-Q for the period ending March 27, 2010 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Lawrence J. Blanford, as the Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

 

Date: May 6, 2010

/s/ Lawrence J. Blanford

Lawrence J. Blanford*
President and Chief Executive Officer

* A signed original of this written statement required by Section 906 has been provided to Green Mountain Coffee Roasters, Inc. and will be retained by Green Mountain Coffee Roasters, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

The foregoing certification is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code) and is not being filed as part of the Form 10-Q or as a separate disclosure document.

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Green Mountain Coffee Roasters, Inc. (the “Company”) on Form 10-Q for the period ending March 27, 2010 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Frances G. Rathke, as the Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

 

Date: May 6, 2010

/s/ Frances G. Rathke

Frances G. Rathke*
Chief Financial Officer

* A signed original of this written statement required by Section 906 has been provided to Green Mountain Coffee Roasters, Inc. and will be retained by Green Mountain Coffee Roasters, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

The foregoing certification is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code) and is not being filed as part of the Form 10-Q or as a separate disclosure document.