XFRA:GM2 Keurig Green Mountain Inc Quarterly Report 10-Q Filing - 6/23/2012

Effective Date 6/23/2012

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FORM 10-Q

 

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

(Mark One)

 

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

 

For the thirteen weeks ended June 23, 2012

 

OR

 

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

 

For the transition period from                      to                     

 

Commission file number 1-12340

 

GREEN MOUNTAIN COFFEE ROASTERS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

03-0339228

(State or other jurisdiction of
incorporation or organization)

 

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

 

33 Coffee Lane, Waterbury, Vermont 05676

(Address of principal executive offices) (zip code)

 

(802) 244-5621

(Registrants’ telephone number, including area code)

 

 

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

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES x NO o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller Reporting Company o

 

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

 

As of July 25, 2012, 155,527,442 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)

 

 

 

June 23,
2012

 

September 24,
2011

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

138,988

 

$

12,989

 

Restricted cash and cash equivalents

 

10,096

 

27,523

 

Receivables, less uncollectible accounts and return allowances of $39,389 and $21,407 at June 23, 2012 and September 24, 2011, respectively

 

265,862

 

310,321

 

Inventories

 

667,005

 

672,248

 

Income taxes receivable

 

7,810

 

18,258

 

Other current assets

 

23,812

 

28,072

 

Deferred income taxes, net

 

45,598

 

36,231

 

Current assets held for sale

 

 

25,885

 

Total current assets

 

1,159,171

 

1,131,527

 

 

 

 

 

 

 

Fixed assets, net

 

846,323

 

579,219

 

Intangibles, net

 

496,793

 

529,494

 

Goodwill

 

791,197

 

789,305

 

Other long-term assets

 

43,646

 

47,759

 

Long-term assets held for sale

 

 

120,583

 

 

 

 

 

 

 

Total assets

 

$

3,337,130

 

$

3,197,887

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Current portion of long-term debt and capital lease obligations

 

$

9,271

 

$

6,669

 

Accounts payable

 

215,153

 

265,511

 

Accrued compensation costs

 

37,913

 

43,260

 

Accrued expenses

 

108,085

 

92,120

 

Income tax payable

 

77,626

 

9,617

 

Deferred income taxes, net

 

 

243

 

Other current liabilities

 

23,827

 

34,613

 

Current liabilities related to assets held for sale

 

 

19,341

 

Total current liabilities

 

471,875

 

471,374

 

 

 

 

 

 

 

Long-term debt and capital lease obligations

 

399,841

 

575,969

 

Deferred income taxes, net

 

212,101

 

189,637

 

Other long-term liabilities

 

28,603

 

27,184

 

Long-term liabilities related to assets held for sale

 

 

474

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Redeemable noncontrolling interests

 

9,828

 

21,034

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Preferred stock, $0.10 par value: Authorized - 1,000,000 shares; No shares issued or outstanding

 

 

 

Common stock, $0.10 par value: Authorized - 500,000,000 shares; Issued and outstanding - 155,526,602 and 154,466,463 shares at June 23, 2012 and September 24, 2011, respectively

 

15,553

 

15,447

 

Additional paid-in capital

 

1,534,166

 

1,499,616

 

Retained earnings

 

678,891

 

411,727

 

Accumulated other comprehensive loss

 

(13,728

)

(14,575

)

Total stockholders’ equity

 

2,214,882

 

1,912,215

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

3,337,130

 

$

3,197,887

 

 

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

 

1



 

GREEN MOUNTAIN COFFEE ROASTERS, INC.

Unaudited Consolidated Statements of Operations

(Dollars in thousands except per share data)

 

 

 

Thirteen

 

Thirteen

 

 

 

weeks ended

 

weeks ended

 

 

 

June 23,
2012

 

June 25,
2011

 

Net sales

 

$

869,194

 

$

717,210

 

Cost of sales

 

565,883

 

453,130

 

Gross profit

 

303,311

 

264,080

 

 

 

 

 

 

 

Selling and operating expenses

 

117,982

 

95,512

 

General and administrative expenses

 

55,601

 

49,258

 

Operating income

 

129,728

 

119,310

 

 

 

 

 

 

 

Other income (expense), net

 

229

 

(233

)

Gain on financial instruments, net

 

3,032

 

482

 

Loss on foreign currency, net

 

(5,068

)

(981

)

Interest expense

 

(6,157

)

(29,830

)

Income before income taxes

 

121,764

 

88,748

 

 

 

 

 

 

 

Income tax expense

 

(48,244

)

(31,778

)

Net Income

 

$

73,520

 

$

56,970

 

 

 

 

 

 

 

Net income attributable to noncontrolling interests

 

224

 

622

 

 

 

 

 

 

 

Net income attributable to GMCR

 

$

73,296

 

$

56,348

 

 

 

 

 

 

 

Basic income per share:

 

 

 

 

 

Basic weighted average shares outstanding

 

155,459,690

 

147,663,350

 

Net income per common share - basic

 

$

0.47

 

$

0.38

 

 

 

 

 

 

 

Diluted income per share:

 

 

 

 

 

Diluted weighted average shares outstanding

 

159,299,578

 

153,344,389

 

Net income per common share - diluted

 

$

0.46

 

$

0.37

 

 

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

 

2



 

GREEN MOUNTAIN COFFEE ROASTERS, INC.

Unaudited Consolidated Statements of Operations

(Dollars in thousands except per share data)

 

 

 

Thirty-nine

 

Thirty-nine

 

 

 

weeks ended

 

weeks ended

 

 

 

June 23,
2012

 

June 25,
2011

 

Net sales

 

$

2,912,462

 

$

1,939,016

 

Cost of sales

 

1,959,509

 

1,288,481

 

Gross profit

 

952,953

 

650,535

 

 

 

 

 

 

 

Selling and operating expenses

 

370,445

 

253,546

 

General and administrative expenses

 

157,349

 

134,788

 

Operating income

 

425,159

 

262,201

 

 

 

 

 

 

 

Other income (expense), net

 

1,589

 

933

 

Loss on financial instruments, net

 

(214

)

(11,819

)

Gain on foreign currency, net

 

1,231

 

4,643

 

Gain on sale of subsidiary

 

26,311

 

 

Interest expense

 

(18,662

)

(52,560

)

Income before income taxes

 

435,414

 

203,398

 

 

 

 

 

 

 

Income tax expense

 

(163,949

)

(78,171

)

Net Income

 

$

271,465

 

$

125,227

 

 

 

 

 

 

 

Net income attributable to noncontrolling interests

 

724

 

1,095

 

 

 

 

 

 

 

Net income attributable to GMCR

 

$

270,741

 

$

124,132

 

 

 

 

 

 

 

Basic income per share:

 

 

 

 

 

Basic weighted average shares outstanding

 

155,071,117

 

143,606,691

 

Net income per common share - basic

 

$

1.75

 

$

0.86

 

 

 

 

 

 

 

Diluted income per share:

 

 

 

 

 

Diluted weighted average shares outstanding

 

159,364,440

 

149,357,480

 

Net income per common share - diluted

 

$

1.70

 

$

0.83

 

 

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

 

3



 

GREEN MOUNTAIN COFFEE ROASTERS, INC.

Unaudited Consolidated Statements of Comprehensive Income

(Dollars in thousands)

 

 

 

Thirteen weeks ended

 

Thirty-nine weeks ended

 

 

 

June 23,
2012

 

June 25,
2011

 

June 23,
2012

 

June 25,
2011

 

Net income

 

$

73,520

 

$

56,970

 

$

271,465

 

$

125,227

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Deferred loss on derivatives designated as cash flow hedges, net of tax benefit of $0.4 million and $1.7 million for the thirteen weeks ended June 23, 2012 and June 25, 2011, respectively, and net of tax benefit of $0.7 million and $2.4 million for the thirty-nine weeks ended June 23, 2012 and June 25, 2011, respectively

 

(540

)

(2,562

)

(975

)

(3,601

)

(Gain) loss on derivatives designated as cash flow hedges reclassified to net income, net of tax (provision)/benefit of $(0.2) million and $0.2 million for the thirteen weeks ended June 23, 2012 and June 25, 2011, respectively, and net of tax (provision)/benefit of $(0.1) million and $0.2 million for the thirty-nine weeks ended June 23, 2012 and June 25, 2011, respectively

 

(263

)

234

 

(64

)

234

 

Foreign currency translation adjustment

 

(14,278

)

(2,953

)

1,931

 

12,937

 

Other comprehensive (loss) gain

 

(15,081

)

(5,281

)

892

 

9,570

 

Total comprehensive income

 

58,439

 

51,689

 

272,357

 

134,797

 

Total comprehensive (loss) income attributable to redeemable noncontrolling interests, net of tax

 

(64

)

561

 

769

 

1,355

 

Total comprehensive income attributable to GMCR

 

$

58,503

 

$

51,128

 

$

271,588

 

$

133,442

 

 

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

 

4



 

GREEN MOUNTAIN COFFEE ROASTERS, INC.

Unaudited Consolidated Statement Of Changes In Redeemable Noncontrolling Interests And Stockholders’ Equity

For the Period Ended June 23, 2012 (Dollars in thousands)

 

 

 

Equity Attributable
to Redeemable

 

 

Common stock

 

Additional paid-in

 

 

 

Accumulated
other comprehensive

 

Stockholders’

 

 

 

Noncontrolling Interests

 

 

Shares

 

Amount

 

capital

 

Retained earnings

 

loss

 

Equity

 

Balance at September 24, 2011

 

$

21,034

 

 

154,466,463

 

$

15,447

 

$

1,499,616

 

$

411,727

 

$

(14,575

)

$

1,912,215

 

Options exercised

 

 

 

870,546

 

87

 

3,074

 

 

 

3,161

 

Issuance of common stock under employee stock purchase plan

 

 

 

130,785

 

13

 

5,218

 

 

 

5,231

 

Restricted stock awards and units

 

 

 

55,701

 

6

 

(6

)

 

 

 

Issuance of common stock under deferred compensation plan

 

 

 

3,107

 

 

 

 

 

 

Stock compensation expense

 

 

 

 

 

13,629

 

 

 

13,629

 

Tax benefit from equity-based compensation plans

 

 

 

 

 

12,453

 

 

 

12,453

 

Deferred compensation expense

 

 

 

 

 

182

 

 

 

182

 

Disposition of noncontrolling interests

 

(10,331

)

 

 

 

 

 

 

 

Redeemable noncontrolling interest included in other long-term liabilities

 

(4,708

)

 

 

 

 

 

 

 

Adjustment of redeemable noncontrolling interests to redemption value

 

3,577

 

 

 

 

 

(3,577

)

 

(3,577

)

Cash distributions

 

(513

)

 

 

 

 

 

 

 

Other comprehensive income, net of tax

 

45

 

 

 

 

 

 

847

 

847

 

Net income

 

724

 

 

 

 

 

270,741

 

 

270,741

 

Balance at June 23, 2012

 

$

9,828

 

 

155,526,602

 

$

15,553

 

$

1,534,166

 

$

678,891

 

$

(13,728

)

$

2,214,882

 

 

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

 

5


 


 

GREEN MOUNTAIN COFFEE ROASTERS, INC.

Unaudited Consolidated Statements of Cash Flows

(Dollars in thousands)

 

 

 

Thirty-nine

 

Thirty-nine

 

 

 

weeks ended

 

weeks ended

 

 

 

June 23,
2012

 

June 25,
2011

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

271,465

 

$

125,227

 

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

 

 

 

 

 

Depreciation

 

89,221

 

50,176

 

Amortization of intangibles

 

34,496

 

29,587

 

Amortization deferred financing fees

 

4,538

 

4,643

 

Loss on extinguishment of debt

 

 

19,732

 

Unrealized gain of foreign currency

 

(535

)

(4,956

)

Loss on disposal of fixed assets

 

2,103

 

421

 

Gain on sale of subsidiary, excluding transaction costs

 

(28,914

)

 

Provision for doubtful accounts

 

2,084

 

2,315

 

Provision for sales returns

 

83,170

 

48,755

 

Unrealized loss on financial instruments, net

 

112

 

7,671

 

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

 

4

 

38

 

Excess tax benefits from equity-based compensation plans

 

(12,449

)

(29,175

)

Deferred income taxes

 

13,198

 

3,343

 

Deferred compensation and stock compensation

 

13,811

 

7,686

 

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

 

 

 

 

 

Receivables

 

(37,895

)

(58,229

)

Inventories

 

6,464

 

(118,113

)

Income tax receivable/payable, net

 

91,032

 

25,533

 

Other current assets

 

4,014

 

2,371

 

Other long-term assets, net

 

(608

)

(11,552

)

Accounts payable

 

(59,130

)

49,134

 

Accrued compensation costs

 

(5,024

)

(1,106

)

Accrued expenses

 

15,341

 

12,054

 

Other current liabilities

 

(3,909

)

(2,388

)

Other long-term liabilities

 

5,593

 

11,541

 

Net cash provided by operating activities

 

488,182

 

174,708

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Change in restricted cash

 

(461

)

98

 

Proceeds from notes receivable

 

240

 

449

 

Acquisition of LJVH Holdings, Inc. (Van Houtte), net of cash acquired

 

 

(907,835

)

Proceeds from sale of subsidiary, net of cash transferred

 

137,733

 

 

Capital expenditures for fixed assets

 

(305,532

)

(175,474

)

Proceeds from disposal of fixed assets

 

340

 

850

 

Other investing activities

 

 

(158

)

Net cash used in investing activities

 

(167,680

)

(1,082,070

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Net change in revolving line of credit

 

(208,678

)

165,835

 

Proceeds from issuance of common stock under compensation plans

 

8,392

 

9,577

 

Proceeds from issuance of common stock for private placement

 

 

291,096

 

Cash distributions to redeemable noncontrolling interests shareholders

 

(513

)

(702

)

Proceeds from issuance of common stock in public equity offering

 

 

673,048

 

Financing costs in connection with public equity offering

 

 

(25,685

)

Excess tax benefits from equity-based compensation plans

 

12,449

 

29,175

 

Principal payments under capital lease obligations

 

(4,255

)

(7

)

Proceeds from borrowings of long-term debt

 

 

796,375

 

Deferred financing fees

 

 

(45,821

)

Repayment of long-term debt

 

(6,231

)

(906,708

)

Net cash (used in) provided by financing activities

 

(198,836

)

986,183

 

 

 

 

 

 

 

Change in cash balances included in current assets held for sale

 

5,160

 

(8,248

)

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

(827

)

1,164

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

125,999

 

71,737

 

Cash and cash equivalents at beginning of period

 

12,989

 

4,401

 

Cash and cash equivalents at end of period

 

$

138,988

 

$

76,138

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

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

 

$

34,293

 

$

26,970

 

Noncash financing and investing activities:

 

 

 

 

 

Fixed assets acquired under capital lease obligations/vendor notes

 

$

44,174

 

$

 

 

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

 

6



 

Green Mountain Coffee Roasters, Inc.

Notes to Unaudited Consolidated Financial Statements

 

1.     Basis of Presentation

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information, the instructions to Form 10-Q, and Rule 10-01 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by GAAP for complete consolidated financial statements.

 

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 thirty-nine week periods ended June 23, 2012 are not necessarily indicative of the results that may be expected for the fiscal year ending September 29, 2012.

 

The September 24, 2011 balance sheet data was derived from audited financial statements but does not include all disclosures required by GAAP.  For further information, refer to the consolidated financial statements and the footnotes included in the Annual Report on Form 10-K for Green Mountain Coffee Roasters, Inc. for the fiscal year ended September 24, 2011.  Throughout this presentation, we refer to the consolidated company as the “Company” and, unless otherwise noted, the information provided is on a consolidated basis.

 

2.     Acquisitions and Divestitures

 

Fiscal Year 2012

 

On October 3, 2011, all the outstanding shares of Van Houtte USA Holdings, Inc., also known as the Van Houtte U.S. Coffee Service business or the “Filterfresh” business, were sold to ARAMARK Refreshment Services, LLC (“ARAMARK”) in exchange for $149.5 million in cash.  Approximately $4.4 million of cash was transferred to ARAMARK as part of the sale and $7.4 million was repaid to ARAMARK upon finalization of the purchase price, resulting in a net cash inflow related to the Filterfresh sale of $137.7 million.  The Company recognized a gain on the sale of $26.3 million during the thirteen weeks ended December 24, 2011.  Filterfresh had been included in the Canadian business unit (“CBU”) segment.

 

As of September 24, 2011, all the assets and liabilities relating to the Filterfresh business were reported in the Consolidated Balance Sheets as assets and liabilities held-for-sale.

 

Filterfresh revenues and net income included in the Company’s consolidated statement of operations were as follows (dollars in thousands, except per share data):

 

 

 

Thirteen

 

Thirteen

 

For the period
September 25, 2011
through

 

For the period
December 17, 2010
(date of acquisition)

 

 

 

weeks ended

 

weeks ended

 

October 3, 2011

 

through

 

 

 

June 23, 2012

 

June 25, 2011

 

(date of sale)

 

June 25, 2011

 

Net sales

 

$

 

$

29,352

 

$

2,286

 

$

62,619

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

 

$

3,947

 

$

229

 

$

9,276

 

Less income attributable to noncontrolling interests

 

 

382

 

20

 

776

 

Net income attributable to GMCR

 

$

 

$

3,565

 

$

209

 

$

8,500

 

 

 

 

 

 

 

 

 

 

 

Diluted net income per share

 

$

 

$

0.02

 

$

 

$

0.06

 

 

After the disposition, the Company continues to sell coffee and brewers to Filterfresh, which prior to the sale of Filterfresh were eliminated and were not reflected in the Consolidated Statement of Operations.  For the thirteen weeks ended June 25, 2011, the Company’s sales to Filterfresh that were eliminated in consolidation were $7.2 million.  For the thirty-nine weeks ended June 23, 2012, the Company’s sales to Filterfresh through October 3, 2011 (date of sale) that were eliminated in consolidation were $0.6 million.  For the thirty-nine weeks ended June 25, 2011, the Company’s sales to

 

7



 

Filterfresh during the period December 17, 2010 (date of acquisition) through June 25, 2011 that were eliminated in consolidation were $15.0 million.

 

Fiscal Year 2011

 

On December 17, 2010, the Company acquired all of the outstanding capital stock of LJVH Holdings, Inc. (“LJVH” and together with its subsidiaries, “Van Houtte”), a specialty coffee roaster headquartered in Montreal, Quebec, for approximately USD $907.8 million, net of cash acquired.  The acquisition was financed with cash on hand and a $1,450.0 million credit facility.  Van Houtte’s functional currency is the Canadian dollar.  Van Houtte’s operations are included in the CBU segment.

 

At the time of the acquisition, the Company accounted for all the assets relating to the Filterfresh business as held-for-sale.

 

The Company finalized the valuation and purchase price allocation for Van Houtte during the third quarter of fiscal 2011.  The Van Houtte acquisition was accounted for under the acquisition method of accounting.  The total purchase price of USD $907.8 million, net of cash acquired, was allocated to Van Houtte’s net tangible assets and identifiable intangible assets based on their estimated fair values as of December 17, 2010.  The fair value assigned to identifiable intangible assets acquired was determined primarily by using an income approach.  The allocation of the purchase price is based upon a valuation determined using management’s and the Company’s estimates and assumptions.  The table below represents the allocation of the purchase price to the acquired net assets of Van Houtte (in thousands):

 

 

 

Total

 

Van Houtte
Canadian
Operations

 

Filterfresh
Assets Held
For Sale

 

Restricted cash

 

$

500

 

$

500

 

$

 

Accounts receivable

 

61,130

 

47,554

 

13,576

 

Inventories

 

42,958

 

36,691

 

6,267

 

Income taxes receivable

 

2,260

 

2,190

 

70

 

Deferred income taxes

 

4,903

 

3,577

 

1,326

 

Other current assets

 

5,047

 

4,453

 

594

 

Fixed assets

 

143,928

 

110,622

 

33,306

 

Intangible assets

 

375,099

 

355,549

 

19,550

 

Goodwill

 

472,331

 

409,493

 

62,838

 

Other long-term assets

 

1,577

 

962

 

615

 

Accounts payable and accrued expenses

 

(54,502

)

(46,831

)

(7,671

)

Other short-term liabilities

 

(4,330

)

(3,404

)

(926

)

Income taxes payable

 

(1,496

)

(1,496

)

 

Deferred income taxes

 

(117,086

)

(104,866

)

(12,220

)

Notes payable

 

(2,914

)

(1,770

)

(1,144

)

Other long-term liabilities

 

(2,452

)

(1,683

)

(769

)

Non-controlling interests

 

(19,118

)

(9,529

)

(9,589

)

 

 

$

907,835

 

$

802,012

 

$

105,823

 

 

The purchase price allocated to Filterfresh was the fair value, less the estimated direct costs to sell Filterfresh established at the acquisition date.  The fair value of Filterfresh was estimated using an income approach, specifically the discounted cash flow (“DCF”) method.  Under the DCF method the fair value is calculated by discounting the projected after-tax cash flows for the business to present value.  The income approach includes assumptions about the amount and timing of future cash flows using projections and other estimates.  A discount rate based on an appropriate weighted average cost of capital was applied to the estimated future cash flows to estimate the fair value.

 

An income approach, specifically the DCF method, was used to value the noncontrolling interests.

 

Amortizable intangible assets acquired, valued at the date of acquisition, include approximately $263.1 million for customer relationships, $10.9 million for trademarks and trade names, $1.4 million for franchises and $0.3 million for

 

8



 

technology.  Indefinite-lived intangible assets acquired include approximately $99.4 million for the Van Houtte trademark which is not amortized.  The definite lived intangible assets classified as held-for-sale are not amortized and approximated $19.5 million.  Amortizable intangible assets are amortized on a straight-line basis over their respective useful lives, and the weighted-average amortization period is 10.8 years.

 

The cost of the acquisition in excess of the fair market value of the tangible and intangible assets acquired less liabilities assumed represents acquired goodwill.  The acquisition provides the Company with an expanded Canadian presence and manufacturing and distribution synergies, which provide the basis of the goodwill recognized with respect to the Van Houtte Canadian operations.  As discussed above, the purchase price allocated to Filterfresh was the fair value, less the estimated direct costs to sell Filterfresh established at the acquisition date.  The excess of the purchase price (fair value) allocated to Filterfresh over the fair value of the net tangible and identifiable intangible assets represents goodwill.  Goodwill and intangible assets are reported in the CBU segment.  The goodwill and intangible assets recognized are not deductible for tax purposes.

 

Acquisition costs were expensed as incurred and totaled approximately $10.7 million for the thirty-nine weeks ended June 25, 2011 and are included in general and administrative expenses for the Company.

 

At June 23, 2012, approximately $8.9 million of the purchase price is held in escrow and is included in restricted cash with the corresponding amount in other current liabilities.

 

The acquisition was completed on December 17, 2010 and accordingly results of operations from such date have been included in the Company’s Statement of Operations.  For the thirteen weeks ended June 23, 2012, the Van Houtte acquisition resulted in an additional $104.5 million of consolidated revenue and $14.1 million of consolidated income before income taxes.  For the thirteen weeks ended June 25, 2011, the Van Houtte acquisition resulted in an additional $111.7 million of consolidated revenue and $13.0 million of consolidated income before income taxes.  For the thirty-nine weeks ended June 23, 2012, the Van Houtte acquisition resulted in an additional $308.4 million of consolidated revenue and $34.2 million of consolidated income before income taxes.  For the thirty-nine weeks ended June 25, 2011, the Van Houtte acquisition resulted in an additional $221.0 million of consolidated revenue and $10.3 million of consolidated income before income taxes.

 

Supplemental Pro Forma Information

 

The following information reflects the Company’s acquisition of Van Houtte as if the transaction had occurred as of the beginning of the Company’s fiscal 2011.  The pro forma information does not necessarily reflect the actual results that would have occurred had the acquisitions 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 pro forma data (dollars in thousands except per share data):

 

 

 

Thirteen

 

Thirty-nine

 

 

 

weeks ended

 

weeks ended

 

 

 

June 25,
2011

 

June 25,
2011

 

Unaudited Consolidated proforma revenue

 

$

717,210

 

$

2,037,846

 

Unaudited Consolidated proforma net income

 

$

56,348

 

$

148,485

 

Unaudited Consolidated proforma diluted earnings per common share

 

$

0.37

 

$

0.99

 

 

3.     Segment Reporting

 

The Company manages its operations through three business segments, the Specialty Coffee business unit (“SCBU”), the Keurig business unit (“KBU”) and CBU.

 

SCBU sources, produces and sells coffee, hot cocoa, teas and other beverages, to be prepared hot or cold, in K-Cup® and Vue® packs (“single serve packs”) and coffee in more traditional packaging including whole bean and ground coffee selections in bags and ground coffee in fractional packs.  These varieties are sold to supermarkets, club stores and convenience stores, restaurants and hospitality, office coffee distributors and also directly to consumers in the United States.  In addition, SCBU sells Keurig® Single Cup Brewing systems and other accessories to supermarkets and directly to consumers.

 

9



 

KBU targets its premium patented single cup brewing systems for use both at-home (“AH”) and away-from-home (“AFH”), in the United States.  KBU sells AH single cup brewers, accessories and coffee, tea, cocoa and other beverages in single serve packs produced mainly by SCBU and CBU primarily to retailers, department stores and mass merchandisers principally processing its sales orders through fulfillment entities for the AH channels.  KBU sells AFH single cup brewers to distributors for use in offices.  KBU also sells AH brewers, a limited number of AFH brewers and single serve packs directly to consumers.  KBU earns royalty income from K-Cup® packs when shipped by its third party licensed roasters, except for shipments of K-Cup® packs to KBU, for which the royalty is recognized as a reduction to the carrying cost of the inventory and as a reduction to cost of sales when sold through to third parties by KBU.  In addition, through the second quarter of fiscal 2011, KBU earned royalty income from K-Cup® packs when shipped by SCBU and CBU.

 

CBU sources, produces and sells coffees and teas and other beverages in a variety of packaging formats, including K-Cup® packs, and coffee in more traditional packaging such as bags, cans and fractional packs, and under a variety of brands.  The varieties are sold primarily to supermarkets, club stores and, through office coffee services to offices, convenience stores and restaurants throughout Canada.  CBU began selling the Keurig® K-Cup® Single Cup Brewing system, accessories and coffee, tea, cocoa, and other beverages in K-Cup® packs to retailers, department stores and mass merchandisers in Canada for the AH channels in the first quarter of 2012.  CBU also manufactures brewing equipment and is responsible for all the Company coffee brand sales in the grocery channel in Canada.  The CBU segment included Filterfresh through October 3, 2011, the date of sale (see Note 2, Acquisitions and Divestitures).

 

Management evaluates the performance of the Company’s operating segments based on several factors, including net sales and income before taxes.  Net sales are recorded on a segment basis and intersegment sales are eliminated as part of the financial consolidation process.  Income before taxes represents earnings before income taxes and includes intersegment interest income and expense and transfer pricing on intersegment sales.  The Company’s manufacturing operations occur within the SCBU and CBU segments, however, the costs of manufacturing are recognized in cost of sales in the operating segment in which the sale occurs.  Information system technology services are mainly centralized while finance functions are primarily decentralized, but currently maintain some centralization through an enterprise shared services group.  Expenses related to certain centralized administrative functions including Accounting and Information System Technology are allocated to the operating segments.  Expenses not specifically related to an operating segment are recorded in the “Corporate” segment.  Corporate expenses are comprised mainly of the compensation and other related expenses of certain of the Company’s senior executive officers and other selected employees who perform duties related to the entire enterprise.  Corporate expenses also include depreciation expense, interest expense, foreign exchange gains or losses, certain corporate legal and acquisition-related expenses and compensation of the board of directors.

 

Identifiable assets by segment are those assets specifically identifiable within each segment and for the SCBU, KBU and CBU segments primarily include accounts receivable, inventories, net property, plant and equipment, goodwill, and other intangible assets.  Corporate assets include primarily cash, short-term investments, deferred tax assets, income tax receivable, certain notes receivable eliminated in consolidation, deferred issuance costs, and fixed assets related to corporate headquarters.  Goodwill and intangibles related to acquisitions are included in their respective segments.

 

Effective with the beginning of the Company’s third quarter of fiscal 2011, KBU no longer records royalty income from SCBU and CBU on shipments of single serve packs, thus removing the need to eliminate royalty income during the financial consolidation process.  Prior to the third quarter of fiscal 2011, the Company recorded intersegment sales and purchases of brewer and K-Cup® packs at a markup.  During the third quarter of fiscal 2011, the Company unified the standard costs of brewer and K-Cup® pack inventories across the segments and began recording intersegment sales and purchases of brewers and K-Cup® packs at new unified standard costs.  This change simplified intercompany transactions by removing the need to eliminate the markup incorporated in intersegment sales as part of the financial consolidation process.

 

As a result of the unification of the standard costs of brewers and K-Cup® packs during the third quarter of fiscal 2011, the Company revalued its segment inventories and recorded an adjustment in each segment, which resulted in an increase in cost of sales and a decrease in inventories.  This adjustment was offset by the reversal of the elimination of intersegment markup in inventories in the consolidation process resulting in no impact to the Company’s consolidated results.

 

The changes described in the two preceding paragraphs were not retrospectively applied.

 

Effective at the beginning of fiscal year 2012, the Company changed its organizational structure to align certain portions of its business by geography.  Prior to fiscal 2012, sales and operations associated with the Timothy’s brand were included in the SCBU segment and a portion of the AH single cup business with retailers in Canada was included in the KBU segment.  Under the new structure, Timothy’s and all of the AH single cup business with retailers in Canada are included

 

10



 

in the CBU segment.  This resulted in a re-assignment of goodwill of $17.1 million from the SCBU segment to the CBU segment using a relative fair value approach.  In addition, effective September 25, 2011, K-Cup® pack and brewer inventories and, beginning in the second quarter of fiscal 2012, Vue® pack and brewer inventories, are now transferred directly between SCBU and KBU.  Intersegment sales are no longer transacted between SCBU and KBU.

 

The following tables summarize selected financial data for segment disclosures for the thirteen and thirty-nine week periods ended June 23, 2012 and June 25, 2011.  Selected financial data for segment disclosures for the thirteen and thirty-nine weeks ended June 25, 2011 have been recast to reflect Timothy’s and the AH single cup business with retailers in Canada in the CBU segment.

 

 

 

For the thirteen weeks ended June 23, 2012
(Dollars in thousands)

 

 

 

SCBU

 

KBU

 

CBU

 

Corporate

 

Eliminations

 

Consolidated

 

Sales to unaffiliated customers

 

$

386,979

 

$

332,792

 

$

149,423

 

$

 

$

 

$

869,194

 

Intersegment sales

 

$

1,684

 

$

2,197

 

$

20,360

 

$

 

$

(24,241

)

$

 

Net sales

 

$

388,663

 

$

334,989

 

$

169,783

 

$

 

$

(24,241

)

$

869,194

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before taxes

 

$

90,519

 

$

22,623

 

$

23,597

 

$

(14,975

)

$

 

$

121,764

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

1,428,189

 

$

813,245

 

$

1,115,797

 

$

601,751

 

$

(621,852

)

$

3,337,130

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock compensation

 

$

1,069

 

$

942

 

$

379

 

$

2,030

 

$

 

$

4,420

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

$

 

$

 

$

 

$

6,157

 

$

 

$

6,157

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property additions

 

$

73,618

 

$

6,890

 

$

7,591

 

$

2,689

 

$

 

$

90,788

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

$

21,670

 

$

3,295

 

$

14,587

 

$

5,322

 

$

 

$

44,874

 

 

11



 

 

 

For the thirteen weeks ended June 25, 2011
(Dollars in thousands )

 

 

 

SCBU

 

KBU

 

CBU

 

Corporate

 

Eliminations

 

Consolidated

 

Sales to unaffiliated customers

 

$

275,651

 

$

285,340

 

$

156,219

 

$

 

$

 

$

717,210

 

Intersegment sales

 

$

72,909

 

$

3,320

 

$

25,959

 

$

 

$

(102,188

)

$

 

Net sales

 

$

348,560

 

$

288,660

 

$

182,178

 

$

 

$

(102,188

)

$

717,210

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before taxes

 

$

66,347

 

$

40,563

 

$

24,743

 

$

(42,905

)

$

 

$

88,748

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

1,010,205

 

$

404,788

 

$

1,299,088

 

$

540,042

 

$

(379,701

)

$

2,874,422

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock compensation

 

$

938

 

$

669

 

$

177

 

$

1,219

 

$

 

$

3,003

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

$

 

$

 

$

 

$

29,830

 

$

 

$

29,830

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property additions

 

$

72,515

 

$

8,580

 

$

8,464

 

$

2,596

 

$

 

$

92,155

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

$

11,152

 

$

2,551

 

$

13,728

 

$

3,548

 

$

 

$

30,979

 

 

 

 

For the thirty-nine weeks ended June 23, 2012
(Dollars in thousands )

 

 

 

SCBU

 

KBU

 

CBU

 

Corporate

 

Eliminations

 

Consolidated

 

Sales to unaffiliated customers

 

$

1,140,829

 

$

1,297,106

 

$

474,527

 

$

 

$

 

$

2,912,462

 

Intersegment sales

 

$

8,447

 

$

7,394

 

$

75,935

 

$

 

$

(91,776

)

$

 

Net sales

 

$

1,149,276

 

$

1,304,500

 

$

550,462

 

$

 

$

(91,776

)

$

2,912,462

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before taxes

 

$

267,775

 

$

118,718

 

$

98,460

 

$

(49,539

)

$

 

$

435,414

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

1,428,189

 

$

813,245

 

$

1,115,797

 

$

601,751

 

$

(621,852

)

$

3,337,130

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock compensation

 

$

3,330

 

$

2,817

 

$

1,504

 

$

5,978

 

$

 

$

13,629

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

$

 

$

 

$

 

$

18,662

 

$

 

$

18,662

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property additions

 

$

267,401

 

$

22,542

 

$

33,006

 

$

35,626

 

$

 

$

358,575

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

$

57,084

 

$

9,705

 

$

42,487

 

$

14,441

 

$

 

$

123,717

 

 

12



 

 

 

For the thirty-nine weeks ended June 25, 2011
(Dollars in thousands )

 

 

 

SCBU

 

KBU

 

CBU

 

Corporate

 

Eliminations

 

Consolidated

 

Sales to unaffiliated customers

 

$

705,872

 

$

882,701

 

$

350,443

 

$

 

$

 

$

1,939,016

 

Intersegment sales

 

$

333,790

 

$

157,476

 

$

73,938

 

$

 

$

(565,204

)

$

 

Net sales

 

$

1,039,662

 

$

1,040,177

 

$

424,381

 

$

 

$

(565,204

)

$

1,939,016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before taxes

 

$

193,160

 

$

93,951

 

$

41,899

 

$

(100,534

)

$

(25,078

)

$

203,398

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

1,010,205

 

$

404,788

 

$

1,299,088

 

$

540,042

 

$

(379,701

)

$

2,874,422

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock compensation

 

$

2,350

 

$

1,685

 

$

290

 

$

3,195

 

$

 

$

7,520

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

$

 

$

 

$

 

$

52,560

 

$

 

$

52,560

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property additions

 

$

128,398

 

$

18,893

 

$

18,756

 

$

14,936

 

$

 

$

180,983

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

$

31,692

 

$

7,215

 

$

31,169

 

$

9,687

 

$

 

$

79,763

 

 

4.     Inventories

 

Inventories consisted of the following (in thousands):

 

 

 

June 23,
2012

 

September 24,
2011

 

Raw materials and supplies

 

$

243,038

 

$

182,811

 

Finished goods

 

423,967

 

489,437

 

 

 

$

667,005

 

$

672,248

 

 

At June 23, 2012 the Company had approximately $401.4 million in green coffee purchase commitments, of which approximately 82% had a fixed price.  These commitments primarily extend through fiscal 2014.  The value of the variable portion of these commitments was calculated using an average “C” price of coffee of $1.63 per pound at June 23, 2012.  In addition to its green coffee commitments, the Company had approximately $266.6 million in fixed price brewer and related accessory purchase commitments and $605.7 million in production raw material commitments at June 23, 2012.  The Company believes based on relationships established with its suppliers that the risk of non-delivery on such purchase commitments is remote.

 

At June 23, 2012, minimum future inventory purchase commitments are as follows (in thousands):

 

Fiscal Year

 

Inventory
Purchase
Obligations

 

Remainder of 2012

 

$

517,975

 

2013

 

254,012

 

2014

 

111,628

 

2015

 

111,351

 

2016

 

114,675

 

Thereafter

 

164,041

 

 

 

$

1,273,682

 

 

13



 

In order to ensure a continuous supply of high quality raw materials some of the Company’s inventory purchase obligations include long-term purchase commitments for certain strategic raw materials critical for the manufacture of portion packs.

 

5.     Fixed Assets

 

Fixed assets consist of the following (in thousands):

 

 

 

Useful Life in
Years

 

June 23,
2012

 

September 24,
2011

 

Production equipment

 

1-15

 

$

462,286

 

$

314,149

 

Coffee service equipment

 

3-7

 

59,385

 

53,319

 

Computer equipment and software

 

1-6

 

102,794

 

78,377

 

Land

 

Indefinite

 

11,546

 

8,790

 

Building and building improvements

 

4-30

 

77,640

 

54,648

 

Furniture and fixtures

 

1-15

 

26,398

 

21,619

 

Vehicles

 

4-5

 

9,318

 

7,860

 

Leasehold improvements

 

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

 

55,224

 

35,496

 

Assets acquired under capital leases

 

5-15

 

43,047

 

 

Construction-in-progress

 

 

 

219,536

 

147,860

 

Total fixed assets

 

 

 

$

1,067,174

 

$

722,118

 

Accumulated depreciation

 

 

 

(220,851

)

(142,899

)

 

 

 

 

$

846,323

 

$

579,219

 

 

Assets acquired under capital leases, net of accumulated depreciation, were $40.1 million at June 23, 2012.

 

Total depreciation and amortization expense relating to all fixed assets was $33.4 million and $19.2 million for the thirteen weeks ended June 23, 2012 and June 25, 2011, respectively.  Total depreciation and amortization expense relating to all fixed assets was $89.2 million and $50.2 million for the thirty-nine weeks ended June 23, 2012 and June 25, 2011, respectively.

 

Assets classified as construction-in-progress are not depreciated, as they are not ready for productive use.  All assets classified as construction-in-progress on June 23, 2012 are expected to be in productive use within the next twelve months.

 

6.     Goodwill and Intangible Assets

 

The following represents the change in the carrying amount of goodwill by segment for the thirty-nine weeks ended June 23, 2012 (in thousands):

 

 

 

SCBU

 

KBU

 

CBU

 

Total

 

Balance at September 24, 2011

 

$

314,042

 

$

72,374

 

$

402,889

 

$

789,305

 

Reassignment of Timothy’s goodwill

 

(17,063

)

 

 

17,063

 

 

Foreign currency effect

 

 

 

1,892

 

1,892

 

Balance at June 23, 2012

 

$

296,979

 

$

72,374

 

$

421,844

 

$

791,197

 

 

Effective September 25, 2011, Timothy’s is included in the CBU segment.  Prior to September 25, 2011, Timothy’s was included in the SCBU segment.  This resulted in a re-assignment of goodwill of $17.1 million from the SCBU segment to the CBU segment using a relative fair value approach.  The amount of goodwill reassigned was determined based on the relative fair values of Timothy’s and SCBU.

 

The carrying value of goodwill is reviewed at least annually for possible impairment.  The Company last conducted its annual impairment test of goodwill as of September 24, 2011.  Goodwill of a reporting unit is tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.  As a result of the decline in the Company’s share price, the Company assessed

 

14



 

whether it was more likely than not the fair value of each reporting unit was less than its carrying amount and determined that it was more likely than not the fair value of each reporting unit was not reduced below its carrying amount.

 

Indefinite-lived intangible assets included in the CBU operating segment consist of the following (in thousands):

 

 

 

June 23, 2012

 

September 24, 2011

 

Trade names

 

$

98,283

 

$

97,824

 

 

Intangible Assets Subject to Amortization

 

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

 

 

 

 

 

June 23, 2012

 

September 24, 2011

 

 

 

Useful Life in
Years

 

Gross Carrying
Amount

 

Accumulated
Amortization

 

Gross Carrying
Amount

 

Accumulated
Amortization

 

Acquired technology

 

4-10

 

$

21,610

 

$

(15,004

)

$

21,609

 

$

(13,525

)

Customer and roaster agreements

 

8-11

 

27,266

 

(16,021

)

27,259

 

(13,723

)

Customer relationships

 

7-16

 

420,037

 

(68,296

)

418,901

 

(40,593

)

Trade names

 

9-11

 

37,650

 

(8,767

)

37,611

 

(5,919

)

Non-compete agreements

 

2-5

 

374

 

(339

)

374

 

(324

)

Total

 

 

 

$

506,937

 

$

(108,427

)

$

505,754

 

$

(74,084

)

 

Definite-lived intangible assets are amortized on a straight-line basis over the period of expected economic benefit.  Total amortization expense was $11.5 million and $11.8 million for the thirteen weeks ended June 23, 2012 and June 25, 2011, respectively.  Total amortization expense was $34.5 million and $29.6 million for the thirty-nine weeks ended June 23, 2012 and June 25, 2011, respectively.

 

The estimated aggregate amortization expense for the remainder of fiscal 2012, for each of the next five years and thereafter, is as follows (in thousands):

 

Remainder of 2012

 

$

11,350

 

2013

 

$

45,387

 

2014

 

$

44,761

 

2015

 

$

43,215

 

2016

 

$

42,510

 

2017

 

$

41,114

 

Thereafter

 

$

170,173

 

 

7.     Assets Held for Sale

 

The following is a summary of the major classes of assets and liabilities of Filterfresh included as assets and liabilities held-for-sale as of September 24, 2011 (in thousands):

 

15



 

Cash

 

$

5,160

 

Accounts receivable, net of allowance for uncollectible accounts of $0.3 million

 

12,734

 

Inventories

 

7,212

 

Other current assets

 

779

 

Total current assets

 

$

25,885

 

 

 

 

 

Fixed Assets

 

$

37,780

 

Intangibles

 

19,550

 

Goodwill

 

62,838

 

Other long-term assets

 

415

 

Total long-term assets

 

$

120,583

 

 

 

 

 

Current portion of long-term debt

 

$

673

 

Accounts payable

 

2,226

 

Accrued compensation

 

2,287

 

Accrued expenses

 

3,229

 

Income taxes payable

 

32

 

Deferred income taxes, net

 

10,894

 

Total current liabilities

 

$

19,341

 

 

 

 

 

Long-term debt

 

$

185

 

Other long-term liabilities

 

289

 

Total long-term liabilities

 

$

474

 

 

In addition, redeemable noncontrolling interests included a non-wholly owned subsidiary included in the Filterfresh business totaling $10.3 million as of September 24, 2011.

 

8.     Product Warranties

 

The Company offers a one-year warranty on all Keurig® Single Cup brewers it sells.  KBU provides for the estimated cost of product warranties, primarily using historical information and repair or replacement costs, at the time product revenue is recognized.  The Company is experiencing warranty claims at a lower rate than the rates experienced over the prior two years, which had related primarily to a component failing at higher-than-anticipated rates in the later stage of the warranty life.  The current rates reflect an improvement in later-stage brewer performance.  Management believes that the lower rates are the result of improvements made in units produced since mid-2011 that incorporated an updated component that improved later-stage performance.  The Company has incorporated the recent improvement in the rate of warranty claims into its estimates used in its reserve for product warranty costs.  However, because brewer failures may arise in the later part of the warranty period, actual warranty costs may exceed the reserve.  As a result, there can be no assurance that the Company will not need to increase the reserve or experience additional warranty expense related to this or other quality issues in future periods.  At this time, management believes that the warranty rates used and related reserves are appropriate.

 

As the Company has grown, it has added significantly to its product testing, quality control infrastructure and overall quality processes.  Nevertheless, as the Company continues to innovate, and its products become more complex, both in design and componentry, product performance may tend to modulate, causing warranty rates to possibly fluctuate going forward, so that they may be higher or lower than the Company is currently experiencing and for which the Company is currently providing for in its warranty reserve.

 

The changes in the carrying amount of product warranties for the thirteen and thirty-nine weeks ended June 23, 2012 and June 25, 2011 are as follows (in thousands):

 

16



 

 

 

Thirteen weeks ended

 

Thirty-nine weeks ended

 

 

 

June 23, 2012

 

June 25, 2011

 

June 23, 2012

 

June 25, 2011

 

Balance, beginning of period

 

$

25,740

 

$

15,715

 

$

14,728

 

$

6,694

 

Provision charged to income

 

2,605

 

6,177

 

38,425

 

27,788

 

Usage

 

(8,962

)

(6,837

)

(33,770

)

(19,427

)

Balance, end of period

 

$

19,383

 

$

15,055

 

$

19,383

 

$

15,055

 

 

For the thirteen and thirty-nine weeks ended June 23, 2012, the Company recorded recoveries of $0.2 million and $8.3 million, respectively, under an agreement with a supplier.  The recoveries were recorded as a reduction to warranty expense and are not reflected in the provision charged to income in the table above.  There were no recoveries for the thirteen and thirty-nine weeks ended June 25, 2011.

 

9.     Noncontrolling Interests

 

In the CBU segment, a portion of the coffee services business operates through non-wholly owned subsidiaries.  The financial statements consolidate entities in which the Company has a controlling financial interest.  Net income attributable to noncontrolling interests reflect the portion of the net income (loss) applicable to the noncontrolling interest partners in the consolidated statement of operations.  The net income attributable to noncontrolling interests is classified in the consolidated statements of operations as part of consolidated net income with the net income attributable to the noncontrolling interests deducted from total consolidated net income.

 

If a change in ownership of a consolidated subsidiary results in a loss of control or deconsolidation, any retained ownership interests are remeasured with the gain or loss reported to net earnings.

 

Redeemable Noncontrolling Interests

 

Redeemable noncontrolling interests may be redeemed by the Company at amounts based on formulas specific to each entity.  The Company classifies redeemable noncontrolling interests outside of shareholders’ equity in the consolidated balance sheet under the caption, Redeemable noncontrolling interests, and measures it at the redemption value at the end of each period.  If the redemption value is greater than the carrying value, an adjustment is recorded in retained earnings to record the noncontrolling interest at its redemption value.

 

On March 26, 2012, two entities in which the Company had redeemable noncontrolling interests were merged.  Under the terms of the merger, the Company retained controlling interest of the newly merged entity.  As a result, no gain or loss was recognized as a result of the merger.  In addition, as the Company’s ownership interest in the newly merged entity remained proportionate with its historical ownership interest in the pre-merged entities, there was no adjustment to the historical carrying amounts.

 

Mandatorily Redeemable Noncontrolling Interests

 

On June 22, 2012, the Company executed a purchase agreement under which the Company is required to purchase a noncontrolling interest holder’s shares in an entity in which the Company has a controlling interest within 30 days of the end of the Company’s third quarter of fiscal year 2014.  As a result, as of June 22, 2012, the Company has a controlling financial interest in an entity whereby the shares held by the noncontrolling interest holder are mandatorily redeemable by the Company.  The Company classifies the mandatorily redeemable noncontrolling interest as a liability in the consolidated balance sheet under the caption, Other long-term liabilities, and measures the liability at the amount of cash that would be paid if settlement occurred at the balance sheet date based on the formula in the shareholder agreement with any change from the prior period recognized as interest expense.  Prior to June 22, 2012, the noncontrolling interest was classified as a redeemable noncontrolling interest outside of shareholders’ equity in the consolidated balance sheet under the caption, Redeemable noncontrolling interests, with any adjustments to record the noncontrolling interest at its redemption value recognized in retained earnings.  At June 23, 2012, the mandatorily redeemable noncontrolling interest included in other long-term liabilities was $4.7 million.

 

17



 

10.  Derivative Financial Instruments

 

Cash Flow Hedges

 

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

 

The Company designates these contracts as cash flow hedges and measures the effectiveness of these derivative instruments at each balance sheet date.  The changes in the fair value of these instruments are classified in accumulated other comprehensive income (“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.

 

Fair Value Hedges

 

The Company enters into foreign currency forward contracts to hedge certain recognized liabilities in currencies other than the Company’s functional currency.  The Company designates these contracts as fair value hedges and measures the effectiveness of these derivative instruments at each balance sheet date.  The changes in the fair value of these instruments along with the changes in the fair value of the hedged liabilities are recognized in net gains or losses on foreign currency on the consolidated statements of operations.

 

Other Derivatives

 

The Company is also exposed to certain foreign currency and interest rate risks on an intercompany note with a foreign subsidiary denominated in Canadian currency.  At June 23, 2012, the Company has a four year, $140.0 million Canadian cross currency swap to exchange interest payments and principal on the intercompany note.  This cross currency swap is not designated as a hedging instrument for accounting purposes and is recorded at fair value, with the changes in fair value recognized in the Consolidated Statements of Operations.  Gains and losses resulting from the change in fair value are largely offset by the financial impact of the re-measurement of the intercompany note.  In accordance with the cross currency swap agreement, on a quarterly basis, the Company pays interest based on the three month Canadian Bankers Acceptance rate and receives interest based on the three month U.S. Libor rate.  Additional interest expense pursuant to the cross currency swap agreement for the thirteen and thirty-nine weeks ended June 23, 2012 was $0.4 million and $1.4 million, respectively.  Additional interest expense pursuant to the cross currency swap agreement for the thirteen and thirty-nine weeks ended June 25, 2011 was $0.6 million.

 

The Company occasionally enters into foreign currency forward contracts and coffee futures contracts which are not designated as hedging instruments for accounting purposes in addition to the foreign currency forward contracts and coffee futures contracts noted above.  Contracts that are not designated as hedging instruments are recorded at fair value with the changes in fair value recognized in the Consolidated Statements of Operations.

 

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

 

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

 

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

 

18