10-Q 1 a14-14008_110q.htm 10-Q

Table of Contents

 

 

 

FORM 10-Q

 

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

(Mark One)

 

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

 

For the thirteen weeks ended June 28, 2014

 

OR

 

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

 

For the transition period from                      to                     

 

Keurig Green Mountain, Inc.

 

 

Commission file number 1-12340

 

Delaware

 

03-0339228

(State or other jurisdiction of
incorporation or organization)

 

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

 

33 Coffee Lane, Waterbury, Vermont  05676

(Address of principal executive offices)  (zip code)

 

(802) 244-5621

(Registrants’ telephone number, including area code)

 

 

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

 

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

 

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

 

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

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller Reporting Company o

 

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

 

As of August 1, 2014, 162,422,470 shares of common stock of the registrant were outstanding.

 

 

 



Table of Contents

 

KEURIG GREEN MOUNTAIN, INC.

Form 10-Q

For the Thirteen Weeks Ended June 28, 2014

 

Table of Contents

 

 

Page

PART I. FINANCIAL INFORMATION

1

Item 1.

Financial Statements

1

 

Unaudited Consolidated Balance Sheets

2

 

Unaudited Consolidated Statements of Operations

3

 

Unaudited Consolidated Statements of Comprehensive Income

4

 

Unaudited Consolidated Statement of Changes in Stockholders’ Equity

6

 

Unaudited Consolidated Statements of Cash Flows

7

 

Notes to Unaudited Consolidated Financial Statements

8

Item 2.

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

28

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

44

Item 4.

Controls and Procedures

46

 

 

PART II. OTHER INFORMATION

47

Item 1.

Legal Proceedings

47

Item 1A.

Risk Factors

47

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

54

Item 6.

Exhibits

54

Signatures

55

 



Table of Contents

 

Part I.  Financial Information

Item 1.  Financial Statements

 

1



Table of Contents

 

KEURIG GREEN MOUNTAIN, INC.

Unaudited Consolidated Balance Sheets

(Dollars in thousands, except per share data)

 

 

 

June 28,
 2014

 

September 28,
 2013

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

1,203,711

 

$

260,092

 

Restricted cash and cash equivalents

 

470

 

560

 

Receivables, less uncollectible accounts and return allowances of $34,492 and $33,640 at June 28, 2014 and September 28, 2013, respectively

 

382,382

 

467,976

 

Inventories

 

639,019

 

676,089

 

Income taxes receivable

 

1,725

 

11,747

 

Other current assets

 

63,680

 

46,891

 

Deferred income taxes, net

 

49,263

 

58,137

 

Total current assets

 

2,340,250

 

1,521,492

 

 

 

 

 

 

 

Fixed assets, net

 

1,105,648

 

985,563

 

Intangibles, net

 

389,419

 

435,216

 

Goodwill

 

773,706

 

788,184

 

Deferred income taxes, net

 

147

 

149

 

Other long-term assets

 

34,494

 

30,944

 

 

 

 

 

 

 

Total assets

 

$

4,643,664

 

$

3,761,548

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Current portion of long-term debt

 

$

17,675

 

$

12,929

 

Current portion of capital lease and financing obligations

 

2,021

 

1,760

 

Accounts payable

 

370,052

 

312,170

 

Dividends payable

 

40,653

 

 

Accrued expenses

 

239,845

 

242,427

 

Deferred income taxes, net

 

113

 

233

 

Other current liabilities

 

12,917

 

27,544

 

Total current liabilities

 

683,276

 

597,063

 

 

 

 

 

 

 

Long-term debt, less current portion

 

145,986

 

160,221

 

Capital lease and financing obligations, less current portion

 

108,177

 

76,061

 

Deferred income taxes, net

 

248,038

 

252,867

 

Other long-term liabilities

 

23,402

 

28,721

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Redeemable noncontrolling interests

 

12,420

 

11,045

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

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

 

 

 

Common stock, $0.10 par value: Authorized - 500,000,000 shares; Issued and outstanding - 162,612,596 and 150,265,809 shares at June 28, 2014 and September 28, 2013, respectively

 

16,261

 

15,026

 

Additional paid-in capital

 

1,846,409

 

1,387,322

 

Retained earnings

 

1,587,707

 

1,252,407

 

Accumulated other comprehensive loss

 

(28,012

)

(19,185

)

Total stockholders’ equity

 

3,422,365

 

2,635,570

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

4,643,664

 

$

3,761,548

 

 

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

 

2



Table of Contents

 

KEURIG GREEN MOUNTAIN, INC.

Unaudited Consolidated Statements of Operations

(Dollars in thousands, except per share data)

 

 

 

Thirteen weeks ended

 

Thirty-nine weeks ended

 

 

 

June 28,
 2014

 

June 29,
 2013

 

June 28,
 2014

 

June 29,
 2013

 

Net sales

 

$

1,022,371

 

$

967,072

 

$

3,512,113

 

$

3,310,923

 

Cost of sales

 

577,779

 

559,454

 

2,146,042

 

2,068,996

 

Gross profit

 

444,592

 

407,618

 

1,366,071

 

1,241,927

 

 

 

 

 

 

 

 

 

 

 

Selling and operating expenses

 

127,855

 

136,742

 

421,075

 

433,368

 

General and administrative expenses

 

85,390

 

77,532

 

226,537

 

220,670

 

Operating income

 

231,347

 

193,344

 

718,459

 

587,889

 

 

 

 

 

 

 

 

 

 

 

Other income, net

 

253

 

237

 

1,935

 

652

 

(Loss) gain on financial instruments, net

 

(2,843

)

4,419

 

4,618

 

8,994

 

Gain (loss) on foreign currency, net

 

8,849

 

(10,391

)

(10,423

)

(19,185

)

Interest expense

 

(2,441

)

(3,937

)

(8,056

)

(13,481

)

Income before income taxes

 

235,165

 

183,672

 

706,533

 

564,869

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

(79,789

)

(67,226

)

(250,369

)

(207,907

)

Net income

 

$

155,376

 

$

116,446

 

$

456,164

 

$

356,962

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to noncontrolling interests

 

225

 

174

 

702

 

686

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to Keurig

 

$

155,151

 

$

116,272

 

$

455,462

 

$

356,276

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to Keurig per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.95

 

$

0.78

 

$

2.93

 

$

2.39

 

Diluted

 

$

0.94

 

$

0.76

 

$

2.88

 

$

2.33

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared per common share

 

$

0.25

 

$

 

$

0.75

 

$

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

162,695,801

 

149,825,581

 

155,267,136

 

149,307,144

 

Diluted

 

164,693,146

 

152,869,392

 

157,922,095

 

152,647,767

 

 

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

 

3



Table of Contents

 

KEURIG GREEN MOUNTAIN, INC.

Unaudited Consolidated Statements of Comprehensive Income

(Dollars in thousands)

 

 

 

Thirteen weeks ended

 

Thirteen weeks ended

 

 

 

June 28, 2014

 

June 29, 2013

 

 

 

Pre-tax

 

Tax (expense)
benefit

 

After-tax

 

Pre-tax

 

Tax (expense)
benefit

 

After-tax

 

Net income

 

 

 

 

 

$

155,376

 

 

 

 

 

$

116,446

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized losses arising during the period

 

$

(593

)

$

183

 

$

(410

)

$

(1,694

)

$

684

 

$

(1,010

)

Losses reclassified to net income

 

2,491

 

(1,023

)

1,468

 

394

 

(159

)

235

 

Foreign currency translation adjustments

 

24,094

 

 

24,094

 

(20,689

)

 

(20,689

)

Other comprehensive gain (loss)

 

$

25,992

 

$

(840

)

$

25,152

 

$

(21,989

)

$

525

 

$

(21,464

)

Total comprehensive income

 

 

 

 

 

180,528

 

 

 

 

 

94,982

 

Total comprehensive gain (loss) attributable to noncontrolling interests

 

 

 

 

 

795

 

 

 

 

 

(349

)

Total comprehensive income attributable to Keurig

 

 

 

 

 

$

179,733

 

 

 

 

 

$

95,331

 

 

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

 

4



Table of Contents

 

KEURIG GREEN MOUNTAIN, INC.

Unaudited Consolidated Statements of Comprehensive Income

(Dollars in thousands)

 

 

 

Thirty-nine weeks ended

 

Thirty-nine weeks ended

 

 

 

June 28, 2014

 

June 29, 2013

 

 

 

Pre-tax

 

Tax (expense)
benefit

 

After-tax

 

Pre-tax

 

Tax (expense)
benefit

 

After-tax

 

Net income

 

 

 

 

 

$

456,164

 

 

 

 

 

$

356,962

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains (losses) arising during the period

 

$

17,663

 

$

(7,150

)

$

10,513

 

$

(972

)

$

393

 

$

(579

)

Losses reclassified to net income

 

3,933

 

(1,604

)

2,329

 

1,122

 

(453

)

669

 

Foreign currency translation adjustments

 

(22,150

)

 

(22,150

)

(42,044

)

 

(42,044

)

Other comprehensive (loss)

 

$

(554

)

$

(8,754

)

$

(9,308

)

$

(41,894

)

$

(60

)

$

(41,954

)

Total comprehensive income

 

 

 

 

 

446,856

 

 

 

 

 

315,008

 

Total comprehensive income (loss) attributable to noncontrolling interests

 

 

 

 

 

219

 

 

 

 

 

(348

)

Total comprehensive income attributable to Keurig

 

 

 

 

 

$

446,637

 

 

 

 

 

$

315,356

 

 

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

 

5



Table of Contents

 

KEURIG GREEN MOUNTAIN, INC.

Unaudited Consolidated Statement of Changes in Stockholders’ Equity

For the Thirty-nine Weeks Ended June 28, 2014

(Dollars in thousands)

 

 

 

Common stock

 

Additional paid-

 

Retained

 

Accumulated
other
comprehensive

 

Stockholders’

 

 

 

Shares

 

Amount

 

in capital

 

earnings

 

loss

 

equity

 

Balance at September 28, 2013

 

150,265,809

 

$

15,026

 

$

1,387,322

 

$

1,252,407

 

$

(19,185

)

$

2,635,570

 

Sale of common stock

 

18,091,139

 

1,809

 

1,346,605

 

 

 

1,348,414

 

Options exercised

 

1,804,378

 

181

 

26,015

 

 

 

26,196

 

Issuance of common stock under employee stock purchase plan

 

108,115

 

11

 

6,936

 

 

 

6,947

 

Restricted stock awards and units

 

42,231

 

4

 

(4

)

 

 

 

Repurchase of common stock

 

(7,699,076

)

(770

)

(996,616

)

 

 

(997,386

)

Stock compensation expense

 

 

 

23,325

 

 

 

23,325

 

Tax benefit from equity-based compensation plans

 

 

 

52,663

 

 

 

52,663

 

Deferred compensation expense

 

 

 

163

 

 

 

163

 

Adjustment of redeemable noncontrolling interests to redemption value

 

 

 

 

(1,804

)

 

(1,804

)

Other comprehensive loss, net of tax

 

 

 

 

 

(8,827

)

(8,827

)

Net income attributable to Keurig

 

 

 

 

455,462

 

 

455,462

 

Cash dividends declared

 

 

 

 

(118,358

)

 

(118,358

)

Balance at June 28, 2014

 

162,612,596

 

$

16,261

 

$

1,846,409

 

$

1,587,707

 

$

(28,012

)

$

3,422,365

 

 

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

 

6



Table of Contents

 

KEURIG GREEN MOUNTAIN, INC.

Unaudited Consolidated Statements of Cash Flows

(Dollars in thousands)

 

 

 

Thirty-nine

 

Thirty-nine

 

 

 

weeks ended

 

weeks ended

 

 

 

June 28,
 2014

 

June 29,
 2013

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

456,164

 

$

356,962

 

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

 

 

 

 

 

Depreciation and amortization of fixed assets

 

159,189

 

137,734

 

Amortization of intangibles

 

32,628

 

34,234

 

Amortization of deferred financing fees

 

4,238

 

4,538

 

Unrealized loss on foreign currency, net

 

5,869

 

15,555

 

(Gain) loss on disposal of fixed assets

 

(603

)

222

 

Provision for doubtful accounts

 

2,294

 

68

 

Provision for sales returns

 

65,853

 

59,209

 

Gain on derivatives, net

 

(2,082

)

(7,872

)

Excess tax benefits from equity-based compensation plans

 

(52,659

)

(47,845

)

Deferred income taxes

 

(1,206

)

8,794

 

Deferred compensation and stock compensation

 

23,488

 

21,393

 

Other

 

1,020

 

881

 

Changes in assets and liabilities:

 

 

 

 

 

Receivables

 

14,579

 

(32,732

)

Inventories

 

34,433

 

175,532

 

Income tax receivable/payable, net

 

62,656

 

48,905

 

Other current assets

 

2,622

 

(34,634

)

Other long-term assets, net

 

2,851

 

3,311

 

Accounts payable and accrued expenses

 

28,117

 

39,082

 

Other current liabilities

 

(10,419

)

(2,469

)

Other long-term liabilities

 

(5,264

)

(8,633

)

Net cash provided by operating activities

 

823,768

 

772,235

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Change in restricted cash

 

90

 

2,852

 

Capital expenditures for fixed assets

 

(221,887

)

(190,388

)

Purchase of long-term investment

 

(10,000

)

 

Other investing activities

 

1,235

 

501

 

Net cash used in investing activities

 

(230,562

)

(187,035

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Net change in revolving line of credit

 

 

(226,210

)

Proceeds from sale of common stock

 

1,348,414

 

 

Proceeds from issuance of common stock under compensation plans

 

33,143

 

21,764

 

Repurchase of common stock

 

(997,386

)

(125,681

)

Excess tax benefits from equity-based compensation plans

 

52,659

 

47,845

 

Payments on capital lease and financing obligations

 

(1,444

)

(2,596

)

Repayment of long-term debt

 

(9,798

)

(6,640

)

Dividends paid

 

(77,705

)

 

Other financing activities

 

(436

)

(1,006

)

Net cash provided by (used in) financing activities

 

347,447

 

(292,524

)

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

2,966

 

1,240

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

943,619

 

293,916

 

Cash and cash equivalents at beginning of period

 

260,092

 

58,289

 

Cash and cash equivalents at end of period

 

$

1,203,711

 

$

352,205

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

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

 

$

59,646

 

$

17,998

 

Dividends declared not paid at the end of each period

 

$

40,653

 

$

 

Noncash investing and financing activities:

 

 

 

 

 

Fixed assets acquired under capital lease and financing obligations

 

$

33,821

 

$

23,461

 

Settlement of acquisition related liabilities through release of restricted cash

 

$

 

$

9,227

 

 

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

 

7



Table of Contents

 

Keurig Green Mountain, Inc.

Notes to Unaudited Consolidated Financial Statements

 

1.              Basis of Presentation

 

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

 

The September 28, 2013 balance sheet data was derived from audited financial statements but does not include all disclosures required by GAAP.  For further information, refer to the consolidated financial statements and the footnotes included in Keurig Green Mountain’s Annual Report on Form 10-K, as amended, for the fiscal year ended September 28, 2013.  Throughout this presentation, we refer to the consolidated company as the “Company” or “Keurig” and, unless otherwise noted, the information provided is on a consolidated basis.

 

In the opinion of management, all adjustments considered necessary for a fair statement of the interim financial data have been included.  Interim results may not be indicative of results for a full year.  Historically, in addition to variations resulting from the holiday season, sales may vary from quarter-to-quarter due to a variety of other factors including, but not limited to, the cost of green coffee, competitor initiatives, marketing programs and weather.

 

2.              Recent Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606).”  ASU 2014-09 supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition, and most industry-specific guidance.  The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  The new standard will require the Company to separate performance obligations within a contract, determine total transaction costs, and ultimately allocate the transaction costs across the established performance obligations.  This ASU will become effective for the Company beginning in fiscal 2018 under either full or modified retrospective adoption, with early adoption not permitted.  The Company is currently assessing the potential effects of these changes on the Company’s net income, financial position and cash flows.

 

In April 2014, FASB issued ASU No. 2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity,which raises the threshold for disposals to qualify as discontinued operations.  A discontinued operation is defined as: (1) a component of an entity or group of components that has been disposed of or classified as held for sale and represents a strategic shift that has or will have a major effect on an entity’s operations and financial results; or (2) an acquired business that is classified as held for sale on the acquisition date.  ASU 2014-08 also requires additional disclosures regarding discontinued operations, as well as material disposals that do not meet the definition of discontinued operations.  It is effective for annual periods beginning on or after December 15, 2014.  Early adoption is permitted but only for disposals that have not been reported in financial statements previously issued.  The adoption of ASU 2014-08 is not expected to have a material impact on the Company’s net income, financial position or cash flows.

 

In July 2013, the FASB issued ASU No. 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists” (“ASU 2013-11”).  ASU 2013-11 was issued to eliminate diversity in practice regarding the presentation of unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists.  Under ASU 2013-11, an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward.  Otherwise, to the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets.  The amendments in this ASU will become effective for the Company beginning in fiscal 2015.  The adoption of ASU 2013-11 is not expected to have a material impact on the Company’s net income, financial position or cash flows.

 

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In March 2013, the FASB issued ASU No. 2013-05, “Foreign Currency Matters (Topic 830): Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity” (“ASU 2013-05”).  ASU 2013-05 provides clarification regarding whether Subtopic 810-10, Consolidation - Overall, or Subtopic 830-30, Foreign Currency Matters - Translation of Financial Statements, applies to the release of cumulative translation adjustments into net income when a reporting entity either sells a part or all of its investment in a foreign entity or ceases to have a controlling financial interest in a subsidiary or group of assets that constitute a business within a foreign entity.  The amendments in this ASU will become effective for the Company beginning in fiscal 2015.  The adoption of ASU 2013-05 is not expected to have a material impact on the Company’s net income, financial position or cash flows.

 

In February 2013, the FASB issued ASU No. 2013-04, “Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date” (“ASU 2013-04”).  ASU 2013-04 provides guidance for the recognition, measurement and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this ASU is fixed at the reporting date.  The guidance requires an entity to measure those obligations as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors as well as any additional amount the reporting entity expects to pay on behalf of its co-obligors.  ASU 2013-04 also requires an entity to disclose the nature and amount of those obligations.  The amendments in this ASU will become effective for the Company beginning in fiscal 2015.  Retrospective application is required.  The adoption of ASU 2013-04 is not expected to have a material impact on the Company’s net income, financial position or cash flows.

 

3.              Segment Reporting

 

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

 

The Domestic segment designs and sells hot beverage system brewers and accessories and sources, produces and sells coffee, hot cocoa, teas and other beverages under a variety of brands in K-Cup®, Vue®, Rivo® and Bolt portion packs (“portion packs”), and coffee in more traditional packaging, including bags and fractional packs, to retailers including supermarkets, department stores, mass merchandisers, club stores, and convenience stores; to restaurants, hospitality accounts, office coffee distributors, and partner brand owners; and to consumers through Company websites.  The Domestic segment primarily distributes its products in the at-home (“AH”) and away-from-home (“AFH”) channels, as well as to consumers through Company websites.  Substantially all of the Domestic segment’s distribution to major retailers is processed by third party fulfillment entities which receive and fulfill sales orders and invoice certain retailers primarily in the AH channel.  The Domestic segment also earns royalty income from licensees under various licensing agreements.

 

The Canada segment sells hot beverage system brewers and accessories, and sources, produces and sells coffee and teas and other beverages in portion packs and coffee in more traditional packaging, including bags, cans and fractional packs, under a variety of brands to retailers, including supermarkets, department stores, mass merchandisers, club stores, office coffee distributors, and, through its office coffee services business, to offices, convenience stores, restaurants, hospitality accounts, and to consumers through its website.

 

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

 

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

 

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The following tables summarize selected financial data for segment disclosures for the thirteen and thirty-nine weeks ended June 28, 2014 and June 29, 2013:

 

 

 

Thirteen weeks ended June 28, 2014

 

 

 

(Dollars in thousands)

 

 

 

Domestic

 

Canada

 

Corporate-
Unallocated

 

Consolidated

 

Net sales

 

$

881,102

 

$

141,269

 

$

 

$

1,022,371

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

$

250,486

 

$

24,781

 

$

(43,920

)

$

231,347

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

$

48,205

 

$

15,329

 

$

2,119

 

$

65,653

 

 

 

 

 

 

 

 

 

 

 

Stock compensation

 

$

3,417

 

$

476

 

$

3,713

 

$

7,606

 

 

 

 

Thirteen weeks ended June 29, 2013

 

 

 

(Dollars in thousands)

 

 

 

Domestic

 

Canada

 

Corporate-
Unallocated

 

Consolidated

 

Net sales

 

$

822,593

 

$

144,479

 

$

 

$

967,072

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

$

213,076

 

$

23,658

 

$

(43,390

)

$

193,344

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

$

44,083

 

$

16,501

 

$

625

 

$

61,209

 

 

 

 

 

 

 

 

 

 

 

Stock compensation

 

$

2,615

 

$

515

 

$

3,001

 

$

6,131

 

 

 

 

Thirty-nine weeks ended June 28, 2014

 

 

 

(Dollars in thousands)

 

 

 

Domestic

 

Canada

 

Corporate-
Unallocated

 

Consolidated

 

Net Sales

 

$

3,043,236

 

$

468,877

 

$

 

$

3,512,113

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

$

761,316

 

$

77,512

 

$

(120,369

)

$

718,459

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

$

137,986

 

$

47,292

 

$

6,539

 

$

191,817

 

 

 

 

 

 

 

 

 

 

 

Stock compensation

 

$

11,068

 

$

2,236

 

$

10,021

 

$

23,325

 

 

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Table of Contents

 

 

 

Thirty-nine weeks ended June 29, 2013

 

 

 

(Dollars in thousands)

 

 

 

Domestic

 

Canada

 

Corporate-
Unallocated

 

Consolidated

 

Net Sales

 

$

2,820,123

 

$

490,800

 

$

 

$

3,310,923

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

$

644,024

 

$

69,855

 

$

(125,990

)

$

587,889

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

$

121,675

 

$

48,938

 

$

1,355

 

$

171,968

 

 

 

 

 

 

 

 

 

 

 

Stock compensation

 

$

7,808

 

$

1,870

 

$

11,525

 

$

21,203

 

 

The following table reconciles operating segments and corporate-unallocated operating income (loss) to consolidated income before income taxes, as presented in the Unaudited Consolidated Statements of Operations (in thousands):

 

 

 

Thirteen weeks ended

 

Thirty-nine weeks ended

 

 

 

June 28, 2014

 

June 29, 2013

 

June 28, 2014

 

June 29, 2013

 

Operating income

 

$

231,347

 

$

193,344

 

$

718,459

 

$

587,889

 

Other income, net

 

253

 

237

 

1,935

 

652

 

(Loss) gain on financial instruments, net

 

(2,843

)

4,419

 

4,618

 

8,994

 

Gain (loss) on foreign currency, net

 

8,849

 

(10,391

)

(10,423

)

(19,185

)

Interest expense

 

(2,441

)

(3,937

)

(8,056

)

(13,481

)

Income before income taxes

 

$

235,165

 

$

183,672

 

$

706,533

 

$

564,869

 

 

4.             Inventories

 

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

 

 

 

June 28,
 2014

 

September 28,
 2013

 

Raw materials and supplies

 

$

179,866

 

$

182,882

 

Finished goods

 

459,153

 

493,207

 

 

 

$

639,019

 

$

676,089

 

 

At June 28, 2014, the Company had approximately $410.5 million in green coffee purchase commitments, of which approximately 92% had a fixed price.  These commitments primarily extend through fiscal 2016.  The value of the variable portion of these commitments was calculated using an average “C” price of coffee of $1.79 per pound at June 28, 2014.  In addition to its green coffee commitments, the Company had approximately $311.5 million in fixed price brewer and related accessory purchase commitments and $1,122.9 million in production raw material commitments at June 28, 2014.  The Company believes, based on relationships established with its suppliers, that the risk of non-delivery on such purchase commitments is remote.

 

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As of June 28, 2014, minimum future inventory purchase commitments were as follows (in thousands):

 

Fiscal Year

 

Inventory
Purchase Obligations
(1)

 

Remainder of 2014

 

$

507,553

 

2015

 

478,574

 

2016

 

264,127

 

2017

 

266,950

 

2018

 

283,676

 

Thereafter

 

44,043

 

 

 

$

1,844,923

 

 


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

 

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5.              Fixed Assets

 

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

 

 

 

Useful Life in Years

 

June 28,
 2014

 

September 28,
 2013

 

Production equipment

 

1-15

 

$

747,430

 

$

680,457

 

Coffee service equipment

 

3-7

 

62,494

 

59,169

 

Computer equipment and software

 

1-7

 

161,468

 

146,246

 

Land

 

Indefinite

 

11,363

 

11,520

 

Building and building improvements

 

4-30

 

151,656

 

134,495

 

Furniture and fixtures

 

1-15

 

31,024

 

33,975

 

Vehicles

 

4-5

 

12,488

 

11,786

 

Leasehold improvements

 

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

 

98,682

 

98,990

 

Assets acquired under capital leases

 

15

 

41,200

 

41,200

 

Construction-in-progress

 

 

 

342,498

 

202,940

 

Total fixed assets

 

 

 

$

1,660,303

 

$

1,420,778

 

Accumulated depreciation and amortization

 

 

 

(554,655

)

(435,215

)

 

 

 

 

$

1,105,648

 

$

985,563

 

 

Assets acquired under capital leases, net of accumulated amortization, were $34.8 million and $36.9 million at June 28, 2014 and September 28, 2013, respectively.

 

Total depreciation and amortization expense relating to all fixed assets was $55.0 million and $49.9 million for the thirteen weeks ended June 28, 2014 and June 29, 2013, respectively.  Total depreciation and amortization expense relating to all fixed assets was $159.2 million and $137.7 million for the thirty-nine weeks ended June 28, 2014 and June 29, 2013, respectively.

 

As of June 28, 2014, construction-in-progress includes $54.9 million relating to properties under construction where the Company is deemed to be the accounting owner, even though the Company is not the legal owner.

 

6.              Goodwill and Intangible Assets

 

The following represented the change in the carrying amount of goodwill by segment for the thirty-nine weeks ended June 28, 2014 (in thousands):

 

 

 

Domestic

 

Canada

 

Total

 

Balance at September 28, 2013

 

$

369,353

 

$

418,831

 

$

788,184

 

Foreign currency effect

 

 

(14,245

)

(14,245

)

Other

 

 

(233

)

(233

)

Balance at June 28, 2014

 

$

369,353

 

$

404,353

 

$

773,706

 

 

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

 

 

 

June 28, 2014

 

September 28, 2013

 

Trade names

 

$

94,416

 

$

97,740

 

 

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Intangible Assets Subject to Amortization

 

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

 

 

 

 

 

June 28, 2014

 

September 28, 2013

 

 

 

Useful Life in 
Years

 

Gross Carrying 
Amount

 

Accumulated 
Amortization

 

Gross Carrying 
Amount

 

Accumulated 
Amortization

 

Acquired technology

 

4-10

 

$

21,599

 

$

(18,387

)

$

21,609

 

$

(17,123

)

Customer and roaster agreements

 

8-11

 

25,417

 

(21,423

)

26,977

 

(19,750

)

Customer relationships

 

2-16

 

404,048

 

(136,945

)

414,967

 

(113,061

)

Trade names

 

9-11

 

36,627

 

(15,933

)

37,200

 

(13,353

)

Non-compete agreements

 

2-5

 

374

 

(374

)

374

 

(364

)

Total

 

 

 

$

488,065

 

$

(193,062

)

$

501,127

 

$

(163,651

)

 

Definite-lived intangible assets are amortized on a straight-line basis over the period of expected economic benefit.  Total amortization expense was $10.7 million and $11.3 million for the thirteen weeks ended June 28, 2014 and June 29, 2013, respectively.  Total amortization expense was $32.6 million and $34.2 million for the thirty-nine weeks ended June 28, 2014 and June 29, 2013, respectively.

 

The estimated aggregate amortization expense for the remainder of fiscal 2014, for each of the next five years and thereafter, is as follows (in thousands):

 

Fiscal Year

 

Amortization Expense

 

Remainder of 2014

 

$

10,446

 

2015

 

41,680

 

2016

 

40,953

 

2017

 

39,557

 

2018

 

39,557

 

2019

 

39,457

 

Thereafter

 

83,353

 

 

7.              Product Warranties

 

The Company offers a one-year warranty on all Keurig® hot beverage system brewers it sells.  The Company provides for the estimated cost of product warranties, primarily using historical information and repair or replacement costs, at the time product revenue is recognized.  Brewer failures may arise in the later part of the warranty period, and actual warranty costs may exceed the reserve.  As the Company has grown, it has added significantly to its product testing, quality control infrastructure and overall quality processes.  Nevertheless, as the Company continues to innovate, and its products become more complex, both in design and componentry, product performance may modulate, causing warranty rates to possibly fluctuate going forward.  As a result, future warranty claims rates may be higher or lower than the Company is currently experiencing and for which the Company is currently providing in its warranty reserve.

 

The changes in the carrying amount of product warranties for the thirteen and thirty-nine weeks ended June 28, 2014 and June 29, 2013 are as follows (in thousands):

 

 

 

Thirteen weeks ended

 

Thirty-nine weeks ended

 

 

 

June 28, 2014

 

June 29, 2013

 

June 28, 2014

 

June 29, 2013

 

Balance, beginning of period

 

$

8,525

 

$

14,456

 

$

7,804

 

$

20,218

 

Provision related to current period

 

3,371

 

960

 

18,435

 

17,014

 

Change in estimate

 

(145

)

(1,566

)

(2,628

)

(10,434

)

Usage

 

(4,716

)

(3,652

)

(16,576

)

(16,600

)

Balance, end of period

 

$

7,035

 

$

10,198

 

$

7,035

 

$

10,198

 

 

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Table of Contents

 

For the thirteen and thirty-nine weeks ended June 28, 2014, the Company recorded recoveries of $0.2 million and $0.9 million, respectively.  There were no recoveries for the thirteen weeks ended June 29, 2013.  For the thirty-nine weeks ended June 29, 2013, the Company recorded recoveries of $0.6 million.  The recoveries are under agreements with suppliers and are recorded as a reduction of warranty expense.  The recoveries are not reflected in the provision charged to income in the table above.

 

8.              Noncontrolling Interests

 

Noncontrolling interests (“NCI”) are evaluated by the Company and are shown as either a liability, temporary equity (shown between liabilities and equity) or as permanent equity depending on the nature of the redeemable features at amounts based on formulas specific to each entity.  Generally, mandatorily redeemable NCIs are classified as liabilities and non-mandatorily redeemable NCIs are classified as either temporary or permanent equity.  Redeemable NCIs that are not mandatorily redeemable are classified outside of stockholders’ equity in the Unaudited Consolidated Balance Sheets as temporary equity under the caption, Redeemable noncontrolling interests, and are measured at their redemption values at the end of each period.  If the redemption value is greater than the carrying value, an adjustment is recorded in retained earnings to record the NCI at its redemption value.  Redeemable NCIs that are mandatorily redeemable are classified as a liability in the Unaudited Consolidated Balance Sheets under the caption, Other current liabilities, and are measured at the amount of cash that would be paid if settlement occurred at the balance sheet date based on the formula in the Share Purchase and Sale Agreement dated June 22, 2012, with any change from the prior period recognized as interest expense.

 

Net income attributable to NCIs reflects the portion of the net income of consolidated entities applicable to the NCI shareholders in the accompanying Unaudited Consolidated Statements of Operations.  The net income attributable to NCIs is classified in the Unaudited Consolidated Statements of Operations as part of consolidated net income and deducted from total consolidated net income to arrive at the net income attributable to the Company.

 

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

 

The changes in the liability and temporary equity attributable to redeemable NCIs for the thirty-nine weeks ended June 28, 2014 are as follows (in thousands):

 

 

 

Liability attributable to
mandatorily redeemable 
noncontrolling interests

 

Equity attributable 
to redeemable 
noncontrolling interests

 

Balance at September 28, 2013

 

$

4,934

 

$

11,045

 

Net income

 

314

 

388

 

Adjustment to redemption value

 

97

 

1,804

 

Cash distributions

 

(348

)

(491

)

Other comprehensive loss

 

(157

)

(326

)

Balance at June 28, 2014

 

$

4,840

 

$

12,420

 

 

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9.              Derivative Financial Instruments

 

Cash Flow Hedges

 

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

 

The Company designates these contracts as cash flow hedges and measures the effectiveness of these derivative instruments at each balance sheet date.  The effective portion of the derivatives’ gains or losses, resulting from changes in the fair value of these instruments is classified in accumulated other comprehensive income (loss), net of related tax effects and is reclassified from other comprehensive income (“OCI”) into earnings in the same period or periods during which the hedged transaction affects earnings.  Any ineffective portion of the derivatives’ gains or losses is recognized in earnings in the period such ineffectiveness occurs.  If it is determined that a derivative is not highly effective, the gain or loss is reclassified into earnings.

 

Fair Value Hedges

 

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

 

Other Derivatives

 

The Company is also exposed to certain foreign currency and interest rate risks on an intercompany note with a foreign subsidiary denominated in Canadian currency.  At June 28, 2014, the Company has approximately 1.5 years remaining on a CDN $90.0 million cross currency swap to exchange interest payments and principal on the intercompany note.  This cross currency swap is not designated as a hedging instrument for accounting purposes and is recorded at fair value, with the changes in fair value recognized in the Unaudited Consolidated Statements of Operations.  Gains and losses resulting from the change in fair value are largely offset by the financial impact of the re-measurement of the intercompany note.  In accordance with the cross currency swap agreement, on a quarterly basis, the Company pays interest based on the three month Canadian Bankers Acceptance rate and receives interest based on the three month U.S. Libor rate.  Additional interest expense pursuant to the cross currency swap agreement for the thirteen and thirty-nine weeks ended June 28, 2014 was $0.3 million and $1.0 million, respectively.  Additional interest expense pursuant to the cross currency swap agreement for the thirteen and thirty-nine weeks ended June 29, 2013 was $0.4 million and $1.3 million, respectively.

 

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

 

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

 

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

 

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

 

 

 

June 28, 2014

 

September 28, 2013

 

Balance Sheet Classification

 

Derivatives designated as cash flow hedges:

 

 

 

 

 

 

 

Interest rate swaps

 

$

(4,186

)

$

(6,004

)

Other current liabilities

 

Coffee futures

 

6,419

 

 

Other current assets

 

Coffee futures

 

 

(3,809

)

Other current liabilities

 

Foreign currency forward contracts

 

(419

)

(141

)

Other current liabilities

 

Foreign currency forward contracts

 

 

13

 

Other current assets

 

 

 

$

1,814

 

$

(9,941

)

 

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedges:

 

 

 

 

 

 

 

Cross currency swap

 

$

2,262

 

$

 

Other current assets

 

Cross currency swap

 

 

(1,253

)

Other current liabilities

 

 

 

$

2,262

 

$

(1,253

)

 

 

 

 

 

 

 

 

 

 

Total

 

$

4,076

 

$

(11,194

)

 

 

 

Offsetting

 

Generally, all of the Company’s derivative instruments are subject to a master netting arrangement under which either party may offset amounts if the payment amounts are for the same transaction and in the same currency.  By election, parties may agree to net other transactions.  In addition, the arrangements provide for the net settlement of all contracts through a single payment in a single currency in the event of default or termination of the contract.  The Company’s policy is to net all derivative assets and liabilities in the accompanying Unaudited Consolidated Balance Sheets when allowable by GAAP.

 

Additionally, the Company has elected to include all derivative assets and liabilities, including those not subject to a master netting arrangement, in the following offsetting tables.

 

Offsetting of financial assets and derivative assets as of June 28, 2014 and September 28, 2013 is as follows (in thousands):

 

 

 

Gross 

 

Gross amounts 

 

Net amount of 
assets presented 

 

Gross amounts not offset in the 
Consolidated Balance Sheet

 

 

 

 

 

amounts of 
recognized 
assets

 

offset in the 
Consolidated 
Balance Sheet

 

in the 
Consolidated 
Balance Sheet

 

Financial 
instruments

 

Cash 
collateral 
received

 

Net amount

 

Derivative assets, as of June 28, 2014

 

$

10,230

 

$

(1,549

)

$

8,681

 

$

 

$

 

$

8,681

 

Derivative assets, as of September 28, 2013

 

13

 

 

13

 

 

 

13

 

 

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Table of Contents

 

Offsetting of financial liabilities and derivative liabilities as of June 28, 2014 and September 28, 2013 is as follows (in thousands):

 

 

 

Gross 

 

Gross amounts 

 

Net amount of 
liabilities 

 

Gross amounts not offset in the 
Consolidated Balance Sheet

 

 

 

 

 

amounts of 
recognized 
liabilities

 

offset in the 
Consolidated 
Balance Sheet

 

presented in the 
Consolidated 
Balance Sheet

 

Financial 
instruments

 

Cash 
collateral 
pledged

 

Net amount

 

Derivative liabilities, as of June 28, 2014

 

$

6,154

 

$

(1,549

)

$

4,605

 

$

 

$

 

$

4,605

 

Derivative liabilities, as of September 28, 2013

 

11,207

 

 

11,207

 

 

 

11,207

 

 

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

 

 

 

Thirteen weeks ended

 

Thirty-nine weeks ended

 

 

 

June 28, 2014

 

June 29, 2013

 

June 28, 2014

 

June 29, 2013

 

Cash Flow Hedges:

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

$

613

 

$

1,020

 

$

1,819

 

$

2,690

 

Coffee futures

 

(787

)

(2,714

)

15,998

 

(3,662

)

Foreign currency forward contracts

 

(419

)

 

(154

)

 

Total

 

$

(593

)

$

(1,694

)

$

17,663

 

$

(972

)

 

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

 

 

 

Thirteen weeks ended

 

Thirty-nine weeks ended

 

Location of Gains 

 

 

 

June 28,
 2014

 

June 29,
 2013

 

June 28,
 2014

 

June 29,
 2013

 

(Losses) Reclassified 
from OCI into Income

 

Coffee futures

 

$

(2,626

)

$

(394

)

$

(4,067

)

$

(1,122

)

Cost of sales

 

Foreign currency forward contracts

 

135

 

 

136

 

 

Cost of sales

 

Foreign currency forward contracts

 

 

 

(2

)

 

Gain (loss) on foreign currency, net

 

Total

 

$

(2,491

)

$

(394

)

$

(3,933

)

$

(1,122

)

 

 

 

The Company expects to reclassify $5.8 million of net gains, net of tax, from OCI to earnings for coffee derivatives within the next twelve months.

 

There were no gains or losses on fair value hedges related to foreign currency forward contracts for the thirteen weeks ended June 28, 2014 and June 29, 2013.  The following table summarizes the amount of gain (loss), gross of tax, on fair value hedges and related hedged items for the thirty-nine weeks ended June 28, 2014, and June 29, 2013 (in thousands):

 

 

 

Thirty-nine weeks ended

 

 

 

 

 

June 28, 2014

 

June 29, 2013

 

 

 

 

 

Gain (loss) on
hedging
derivatives

 

Gain (loss) on
hedged items

 

Gain (loss) on
hedging
derivatives

 

Gain (loss) on
hedged items

 

Location of Gain (Loss) Recognized 
in Income on Derivative

 

Foreign currency forward contracts

 

$

 

$

 

$

(10

)

$

10

 

Gain (loss) on foreign currency, net

 

 

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Table of Contents

 

See Note 12, Stockholders’ Equity, for a reconciliation of derivatives in beginning accumulated other comprehensive income (loss) to derivatives in ending accumulated other comprehensive income (loss).

 

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

 

 

 

Thirteen weeks ended

 

Thirty-nine weeks ended

 

Location of net (loss) gain in 

 

 

 

June 28,
 2014

 

June 29,
 2013

 

June 28,
 2014

 

June 29,
 2013

 

Unaudited Consolidated 
Statements of Operations

 

Net (loss) gain on cross currency swap

 

$

(2,843

)

$

4,419

 

$

4,618

 

$

8,994

 

(Loss) gain on financial instruments, net

 

Net gain on coffee futures

 

829

 

 

7,005

 

 

Cost of sales

 

Total

 

$

(2,014

)

$

4,419

 

$

11,623

 

$

8,994

 

 

 

 

In addition, for the thirteen and thirty-nine weeks ended June 28, 2014, the Company recognized $0.02 million in net losses and $1.3 million in net gains, respectively, as a cost of sale representing the ineffective portion on coffee futures designated as cash flow hedges.  No amounts were recognized for the thirteen and thirty-nine weeks ended June 29, 2013 for ineffectiveness.

 

10.      Fair Value Measurements

 

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

 

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

 

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

 

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

 

The following table summarizes the fair values and the levels used in fair value measurements as of June 28, 2014 for the Company’s financial assets (liabilities) (in thousands):

 

 

 

Fair Value Measurements Using

 

 

 

Level 1

 

Level 2

 

Level 3

 

Derivatives:

 

 

 

 

 

 

 

Interest rate swaps

 

$

 

$

(4,186

)

$

 

Cross currency swap

 

 

2,262

 

 

Coffee futures

 

 

6,419

 

 

Foreign currency forward contracts

 

 

(419

)

 

Total

 

$

 

$

4,076

 

$

 

 

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Table of Contents

 

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

 

 

 

Fair Value Measurements Using

 

 

 

Level 1

 

Level 2

 

Level 3

 

Derivatives:

 

 

 

 

 

 

 

Interest rate swaps

 

$

 

$

(6,004

)

$

 

Cross currency swap

 

 

(1,253

)

 

Coffee futures

 

 

(3,809

)

 

Forward currency forward contracts

 

 

(128

)

 

Total

 

$

 

$

(11,194

)

$

 

 

Derivatives

 

Level 2 derivative financial instruments use inputs that are based on market data of identical (or similar) instruments, including forward prices for commodities, interest rate curves and spot prices that are in observable markets.  Derivatives recorded on the balance sheet are at fair value with changes in fair value recorded in other comprehensive income for cash flow hedges and in the Unaudited Consolidated Statements of Operations for fair value hedges and derivatives that do not qualify for hedge accounting treatment.

 

Derivative financial instruments include coffee futures contracts, interest rate swap agreements, a cross currency swap agreement and foreign currency forward contracts.  The Company has identified significant concentrations of credit risk based on the economic characteristics of the instruments that include interest rates, commodity indexes and foreign currency rates and selectively enters into the derivative instruments with counterparties using credit ratings.

 

To determine fair value, the Company utilizes the market approach valuation technique for coffee futures and foreign currency forward contracts and the income approach for interest rate and cross currency swap agreements.  The Company’s fair value measurements include a credit valuation adjustment for the significant concentrations of credit risk.

 

As of June 28, 2014, the amount of loss estimated by the Company due to credit risk associated with the derivatives for all significant concentrations was not material based on the factors of an industry recovery rate and a calculated probability of default.

 

Long-Term Debt

 

The carrying value of long-term debt was $163.7 million and $173.2 million as of June 28, 2014 and September 28, 2013, respectively.  The inputs to the calculation of the fair value of long-term debt are considered to be Level 2 within the fair value hierarchy, as the measurement of fair value is based on the net present value of calculated interest and principal payments, using an interest rate derived from a fair market yield curve adjusted for the Company’s credit rating.  The carrying value of long-term debt approximates fair value as the interest rate on the debt is based on variable interest rates that reset every 30 days.

 

Long-Term Investment

 

The Company has a long-term investment of approximately $10.0 million included in other long-term assets in the accompanying Unaudited Consolidated Balance Sheet as of June 28, 2014, that is not publicly traded.  This investment is carried at cost and reviewed quarterly for indicators of other-than-temporary impairment.  There were no events or circumstances during the fiscal quarter ended June 28, 2014 that indicated a decline in the fair value of the investment.

 

11.       Income Taxes

 

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

 

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Table of Contents

 

As of June 28, 2014, the Company had a $17.7 million state capital loss carryforward and a state net operating loss carryforward of $11.5 million available to be utilized against future taxable income for years through fiscal 2015 and 2029, respectively, subject to annual limitation pertaining to change in ownership rules under the Internal Revenue Code of 1986, as amended.  Based upon earnings history, the Company concluded that it is more likely than not that the net operating loss carryforward will be utilized prior to its expiration, but that the capital loss carryforward will not.  The Company has recorded a valuation allowance against the entire deferred tax asset balance for the capital loss carryforward.

 

The total amount of unrecognized tax benefits as of June 28, 2014 and September 28, 2013 was $17.2 million and $23.3 million, respectively.  The amount of unrecognized tax benefits at June 28, 2014 that would impact the effective tax rate if resolved in favor of the Company is $17.2 million.  As a result of prior acquisitions, the Company is indemnified for $9.5 million of the total reserve balance, and the indemnification is capped at CDN $37.9 million.  If these unrecognized tax benefits are resolved in favor of the Company, the associated indemnification receivable, recorded in other long-term assets, would be reduced accordingly.  The indemnifications have expiration dates through June 2015.

 

As of June 28, 2014 and September 28, 2013, accrued interest and penalties of $2.4 million and $2.0 million, respectively, were included in the Consolidated Balance Sheets.  The Company recognizes interest and penalties in income tax expense.  The Company released $3.2 million of unrecognized tax benefits in the current quarter of fiscal 2014 and expects to release an additional $5.1 million over the next twelve months due to the expiration of the statute of limitations.

 

In the normal course of business, the Company is subject to tax examinations by taxing authorities both inside and outside of the United States.  Generally speaking, the Company is no longer subject to examination with respect to returns filed for fiscal years prior to 2010.

 

12.       Stockholders’ Equity

 

Stock Repurchase Program

 

Throughout various times during fiscal 2012, 2013, and 2014, Keurig’s Board of Directors authorized the Company to repurchase a total of $2.5 billion of the Company’s common stock.

 

Under its existing repurchase programs, on February 28, 2014, the Company entered into an accelerated share repurchase (“ASR”) agreement with a major financial institution (“Bank”).  The ASR allows the Company to buy a large number of shares immediately at a purchase price determined by an average market price over a period of time.  Under the ASR, the Company agreed to purchase $700.0 million of its common stock, in total, with an initial delivery to the Company of 4,340,508 shares (“Initial Shares”) of the Company’s common stock by the Bank.  The Initial Shares represent the number of shares at the current market price equal to 70% of the total fixed purchase price of $700.0 million.  The repurchased shares were retired and returned to an unissued status.  The par value of the repurchased shares of $0.4 million was deducted from common stock and the excess repurchase price over the par value of $489.6 million was deducted from additional paid-in capital.  The remainder of the total purchase price of $210.0 million reflects the value of the stock held by the Bank pending final settlement and, accordingly, was recorded as a reduction to additional paid-in capital.  Final settlement of the ASR will occur no sooner than November 24, 2014 and no later than February 27, 2015 at the Bank’s discretion.  Upon settlement of the ASR, the total shares repurchased by the Company will be determined based on a share price equal to the daily volume weighted-average price (“VWAP”) of the Company’s common stock during the term of the ASR program, less a fixed per share discount amount.  At settlement, the Bank will deliver additional shares to the Company in the event total shares are greater than the 4,340,508 shares initially delivered, and the Company will issue additional shares to the Bank in the event total shares are less than the shares initially delivered.  The receipt or issuance of additional shares will result in a reclassification between additional paid-in capital and common stock equal to the par value of the additional shares received or issued.  The number of shares that may be required to be issued by the Company to the Bank is limited to 10.0 million shares under the ASR.

 

The Company reflected the unsettled portion of the ASR ($210.0 million) as a repurchase of common stock for purposes of calculating earnings per share and as a forward contract indexed to its own common stock.  The forward contract met all of the applicable criteria for equity classification, and, therefore, was not accounted for as a derivative instrument.

 

As of June 28, 2014, based on the VWAP of the Company’s common stock for the period February 28, 2014 through June 28, 2014, settlement of the ASR would have resulted in 2.3 million additional shares delivered by the Bank to the Company.

 

An aggregate amount of $1,237.9 million remained authorized for common stock repurchase as of June 28, 2014.

 

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Table of Contents

 

Summary of share repurchase activity:

 

 

 

Thirty-nine weeks ended

 

 

 

 

 

June 28, 2014(1)

 

Fiscal 2013

 

Number of shares acquired

 

7,699,076

 

5,642,793

 

Average price per share of acquired shares

 

$

102.27

 

$

33.37

 

Total cost of acquired shares (in thousands)

 

$

997,386

 

$

188,278

 

 


(1)Number of shares acquired and average price per share reflect Initial Shares at then current market price, subject to change pending final settlement, and total cost of acquired shares includes total purchase price of $700.0 million under the ASR.

 

Accumulated Other Comprehensive Income (Loss)

 

The following table provides the changes in the components of accumulated other comprehensive income (loss), net of tax (in thousands) for the thirty-nine weeks ended June 28, 2014:

 

 

 

Cash Flow Hedges

 

Translation

 

Accumulated Other 
Comprehensive Income
(Loss)

 

Balance at September 28, 2013

 

$

(7,150

)

$

(12,035

)

$

(19,185

)

Other comprehensive loss, before reclassifications

 

10,513

 

(21,667

)

(11,154

)

Amounts reclassified from accumulated other comprehensive income (loss)

 

2,329

 

 

2,329

 

Foreign currency exchange impact on cash flow hedges

 

(2

)

 

(2

)

Net current period other comprehensive loss

 

12,840

 

(21,667

)

(8,827

)

Balance at June 28, 2014

 

$

5,690

 

$

(33,702

)

$

(28,012

)

 

The unfavorable translation adjustment change during the thirty-nine weeks ended June 28, 2014 was primarily due to the weakening of the Canadian dollar against the U.S. dollar.  The favorable cash flow hedges during the thirty-nine weeks ended June 28, 2014 was primarily due to increases in “C” price of coffee.  See also Note 9, Derivative Financial Instruments.

 

Common Stock Sales

 

On February 27, 2014, the Company sold 16,684,139 shares of its common stock to Atlantic Industries, an indirect wholly owned subsidiary of The Coca-Cola Company, at $74.98 per share for an aggregate purchase price of $1,251.0 million, pursuant to a common stock purchase agreement dated February 5, 2014.  In addition, pursuant to pre-emptive rights set forth in the common stock purchase agreement (“CSPA”) between the Company and Luigi Lavazza S.p.A (“Lavazza) dated August 10, 2010, on March 28, 2014, the Company entered into another common stock purchase agreement with Lavazza to sell 1,407,000 shares of its common stock to Lavazza at $74.98 per share for an aggregate purchase price of $105.5 million.  Pursuant to the CSPA, in connection with the proposed offering of common stock to Atlantic Industries, Lavazza is entitled to maintain its current percentage ownership of the Company’s outstanding common stock on terms (including price) not less favorable than those proposed for the Atlantic Industries offering.  The Lavazza transaction closed on April 17, 2014.  Both common stock sales were recorded to stockholders’ equity during the thirty-nine weeks ended June 28, 2014, net of transaction-related expenses of approximately $8.0 million.

 

Common Stock Dividends

 

During the third quarter of fiscal 2014, the Company declared a quarterly dividend of $0.25 per common share, or $40.7 million in the aggregate, payable on August 1, 2014 to shareholders of record on July 3, 2014.  During the thirty-nine weeks ended June 28, 2014, the Company paid dividends of approximately $77.7 million.

 

On August 4, 2014, the Company’s Board of Directors declared the Company’s next regular quarterly cash dividend of $0.25 per common share, payable on October 31, 2014, to shareholders of record as of the close of business on October 3, 2014.

 

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Table of Contents

 

No cash dividends were declared or paid in fiscal 2013.

 

13.       Compensation Plans

 

Stock Option Plans

 

The grant-date fair value of employee stock options and similar instruments is estimated using the Black-Scholes option-pricing model with the following assumptions for grants issued during the thirty-nine weeks ended June 28, 2014 and June 29, 2013:

 

 

 

Thirty-nine weeks ended

 

 

 

June 28,
2014

 

June 29,
2013

 

Average expected life

 

5.5 years

 

6.0 years

 

Average volatility

 

74

%

81

%

Dividend yield

 

1.31

%

%

Risk-free interest rate

 

1.70

%

1.02

%

Weighted average fair value

 

$

42.04

 

$

31.17

 

 

Restricted Stock Units and Other Awards

 

The Company awards restricted stock units (“RSUs”), restricted stock awards (“RSAs”) and performance stock units (“PSUs”) to eligible employees (“Grantee”) which entitle a Grantee to receive shares of the Company’s common stock.  RSUs and PSUs are awards denominated in units that are settled in shares of the Company’s common stock upon vesting.  RSAs are awards of common stock that are restricted until the shares vest.  In general, RSUs and RSAs vest based on a Grantee’s continuing employment.  The vesting of PSUs is conditioned on the achievement of both a Grantee’s service and the Company’s performance requirements.  The fair value of RSUs, RSAs and PSUs is based on the closing price of the Company’s common stock on the grant date.  Compensation expense for RSUs and RSAs is recognized ratably over a Grantee’s service period.  Compensation expense for PSUs is also recognized over a Grantee’s service period, but only if and when the Company concludes that it is probable (more than likely) the performance condition(s) will be achieved.  The assessment of the probability of achievement is performed each period based on the relevant facts and circumstances at that time, and if the estimated grant-date fair value changes as a result of that assessment, the cumulative effect of the change on current and prior periods is recognized in the period of change.  All awards are reserved for issuance under the Company’s Amended and Restated 2006 Incentive Plan (the “2006 Plan”) and the Company’s 2014 Omnibus Incentive Plan.  The awards vest over periods determined by the Board of Directors, generally in the range of three to four years for RSUs and RSAs, and three years for PSUs.

 

In addition, in fiscal 2013 the Company awarded deferred cash awards (“DCAs”) to Grantees which entitle a Grantee to receive cash over time upon vesting.  The vesting of DCAs is over a four year period conditioned on a Grantee’s continued employment.

 

Employee Stock Purchase Plan

 

The grant-date fair value of employees’ purchase rights under the Company’s Employee Stock Purchase Plan is estimated using the Black-Scholes option-pricing model with the following assumptions for the purchase rights granted during the thirty-nine weeks ended June 28, 2014 and June 29, 2013:

 

 

 

Thirty-nine weeks ended

 

 

 

June 28,
2014

 

June 29,
2013

 

Average expected life

 

6 months

 

6 months

 

Average volatility

 

55

%

86

%

Dividend yield

 

1.14

%

%

Risk-free interest rate

 

0.06

%

0.13

%

Weighted average fair value

 

$

27.28

 

$

14.38

 

 

Income before income taxes in the Unaudited Consolidated Statements of Operations includes compensation expense related to the plans described above of $7.6 million and $6.1 million for the thirteen weeks ended June 28, 2014 and June 29, 2013, respectively; and $23.3 million and $21.2 million for the thirty-nine weeks ended June 28, 2014 and June 29, 2013, respectively.

 

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14.       Legal Proceedings

 

On May 9, 2011, an organization named Council for Education and Research on Toxics (“CERT”), purporting to act in the public interest, filed suit in Los Angeles Superior Court (Council for Education and Research on Toxics v. Brad Barry LLC, et al., Case No. BC461182) against several companies, including the Company, that roast, package, or sell coffee in California.  The Brad Barry complaint alleges that coffee contains the chemical acrylamide and that the Company and the other defendants are required to provide warnings under section 25249.6 of the California Safe Drinking Water and Toxics Enforcement Act, better known as Proposition 65.  Acrylamide is not added to coffee, but forms in trace amounts (parts per billion) as part of a chemical reaction that occurs in the coffee bean when it is roasted.  Therefore it is present in all roasted coffee.  To date, the Company is unaware of any reliable method for reducing acrylamide levels in coffee without adversely affecting the quality of the product.  The Brad Barry action has been consolidated for all purposes with another Proposition 65 case filed by CERT on April 13, 2010 over allegations of acrylamide in “ready to drink” coffee sold in restaurants, convenience stores, and donut shops.  (Council for Education and Research on Toxics v. Starbucks Corp., et al., Case No. BC 415759).  The Company was not named in the Starbucks complaint.  The Company has joined a joint defense group (“JDG”) organized to address CERT’s allegations, and the Company intends to vigorously defend against these allegations.  The Court has ordered the case phased for discovery and trial.  The first phase of the case, which has been set for trial on September 8, 2014, is limited to three affirmative defenses shared by all defendants in both cases, with other affirmative defenses, plaintiff’s prima facie case, and remedies deferred for subsequent phases.  Fact discovery on the first phase of the case was completed in January 2014 and expert discovery was completed in July 2014.  At this start of the proceedings, the Company is unable to predict its outcome, the potential loss or range of loss, if any, associated with its resolution or any potential effect it may have on the Company or its operations.

 

On January 24, 2012, Teashot, LLC (“Teashot”) filed suit against the Company, Keurig and Starbucks Corp. (“Starbucks”) in the United States District Court for the District of Colorado (Civil Action No. 12-cv-00189-WJM-KMT) for patent infringement related to the making, using, importing, selling and/or offering for sale of K-Cup® portion packs containing tea.  The suit alleges that the Company, Keurig and Starbucks infringe a Teashot patent (U.S. Patent No. 5,895,672).  Teashot seeks an injunction prohibiting the Company, Keurig and Starbucks from continued infringement, as well as money damages.  Pursuant to the Company’s Manufacturing, Sales and Distribution Agreement with Starbucks, the Company is defending and indemnifying Starbucks in connection with the suit.  On May 24, 2013, the Company and Keurig, for themselves and Starbucks, filed a motion for summary judgment of non-infringement.  On July 19, 2013, Teashot filed a motion for partial summary judgment on certain other, unrelated issues.  On February 6, 2014, the district court granted the Company’s motion for summary judgment and denied Teashot’s motion.  The court also awarded the Company its costs.  On February 27, 2014, Teashot filed a notice of appeal with the United States Court of Appeals for the Federal Circuit seeking review of the District Court’s decision.  That appeal is now pending, and oral argument has not been scheduled.  At this time, the Company is unable to predict the outcome of this lawsuit, the potential loss or range of loss, if any, associated with the resolution of this lawsuit or any potential effect it may have on the Company or its operations.

 

Securities and Exchange Commission (“SEC”) Inquiry

 

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

 

Stockholder Litigation

 

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

 

The first putative securities fraud class action, captioned Louisiana Municipal Police Employees’ Retirement System (“LAMPERS”) v. Green Mountain Coffee Roasters, Inc., et al., Civ. No. 2:11-cv-00289, was filed in the United States District Court for the District of Vermont before the Honorable William K. Sessions, III.  Plaintiffs’ amended complaint alleged violations of the federal securities laws in connection with the Company’s disclosures relating to its revenues and its inventory accounting practices. 

 

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The amended complaint sought class certification, compensatory damages, attorneys’ fees, costs, and such other relief as the court should deem just and proper.  Plaintiffs sought to represent all purchasers of the Company’s securities between February 2, 2011 and November 9, 2011.  The initial complaint filed in the action on November 29, 2011 included counts for alleged violations of (1) Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 (the “Securities Act”) against the Company, certain of its officers and directors, and the Company’s underwriters in connection with a May 2011 secondary common stock offering; and (2) Section 10(b) of the Exchange Act and Rule 10b-5 against the Company and the officer defendants, and for violation of Section 20(a) of the Exchange Act against the officer defendants.  Pursuant to the Private Securities Litigation Reform Act of 1995, 15 U.S.C. § 78u-4(a)(3), plaintiffs had until January 30, 2012 to move the court to serve as lead plaintiff of the putative class.  Competing applications were filed and the Court appointed Louisiana Municipal Police Employees’ Retirement System, Sjunde AP-Fonden, Board of Trustees of the City of Fort Lauderdale General Employees’ Retirement System, Employees’ Retirement System of the Government of the Virgin Islands, and Public Employees’ Retirement System of Mississippi as lead plaintiffs’ counsel on April 27, 2012.  Pursuant to a schedule approved by the court, plaintiffs filed their amended complaint on October 22, 2012, and plaintiffs filed a corrected amended complaint on November 5, 2012.  Plaintiffs’ amended complaint did not allege any claims under the Securities Act against the Company, its officers and directors, or the Company’s underwriters in connection with the May 2011 secondary common stock offering.  Defendants moved to dismiss the amended complaint on March 1, 2013 and on December 20, 2013, the court issued an order dismissing the amended complaint with prejudice.  On January 21, 2014, plaintiffs filed a notice of intent to appeal the court’s December 20, 2013 order to the United States Court of Appeals for the Second Circuit.  Pursuant to a schedule entered by the appeals court, briefing on the appeal was completed on June 23, 2014.  The Second Circuit has tentatively scheduled oral argument to occur during the week of October 27, 2014.  The underwriters previously named as defendants notified the Company of their intent to seek indemnification from the Company pursuant to their underwriting agreement dated May 5, 2011 in regard to the claims asserted in this action.

 

The second putative securities fraud class action, captioned Fifield v. Green Mountain Coffee Roasters, Inc., Civ. No. 2:12-cv-00091, was also filed in the United States District Court for the District of Vermont before the Honorable William K. Sessions, III.  Plaintiffs’ amended complaint alleged violations of the federal securities laws in connection with the Company’s disclosures relating to its forward guidance.  The amended complaint included counts for alleged violations of Section 10(b) of the Exchange Act and Rule 10b-5 against all defendants, and for alleged violation of Section 20(a) of the Exchange Act against the officer defendants.  The amended complaint sought class certification, compensatory damages, equitable and/or injunctive relief, attorneys’ fees, costs, and such other relief as the court should deem just and proper.  Plaintiffs sought to represent all purchasers of the Company’s securities between February 2, 2012 and May 2, 2012.  Pursuant to the Private Securities Litigation Reform Act of 1995, 15 U.S.C. § 78u-4(a)(3), plaintiffs had until July 6, 2012 to move the court to serve as lead plaintiff of the putative class.  On July 31, 2012, the court appointed Kambiz Golesorkhi as lead plaintiff and approved his selection of Kahn Swick & Foti LLC as lead counsel.  On August 14, 2012, the court granted the parties’ stipulated motion for filing of an amended complaint and to set a briefing schedule for defendants’ motions to dismiss.  Pursuant to a schedule approved by the court, plaintiffs filed their amended complaint on October 23, 2012, adding William C. Daley as an additional lead plaintiff.  Defendants moved to dismiss the amended complaint on January 17, 2013 and the briefing of their motions was completed on May 17, 2013.  On September 26, 2013, the court issued an order granting defendants’ motions and dismissing the amended complaint without prejudice and allowing plaintiffs a 30-day period within which to amend their complaint.  On October 18, 2013, plaintiffs filed a notice of intent to appeal the court’s September 26, 2013 order to the United States Court of Appeals for the Second Circuit.  On July 8, 2014, the Second Circuit issued a mandate affirming dismissal of the action.

 

The first putative stockholder derivative action, a consolidated action captioned In re Green Mountain Coffee Roasters, Inc. Derivative Litigation, Civ. No. 2:10-cv-00233, premised on the same allegations asserted in the now dismissed Horowitz v. Green Mountain Coffee Roasters, Inc., Civ. No. 2:10-cv-00227 securities class action complaint and the other pending putative securities class action complaints described above, is pending in the United States District Court for the District of Vermont before the Honorable William K. Sessions, III.  On November 29, 2010, the federal court entered an order consolidating two actions and appointing the firms of Robbins Umeda LLP and Shuman Law Firm as co-lead plaintiffs’ counsel.  On February 23, 2011, the federal court approved a stipulation filed by the parties providing for a temporary stay of that action until the court rules on defendants’ motions to dismiss the consolidated complaint in the Horowitz putative securities fraud class action.  On March 7, 2012, the federal court approved a further joint stipulation continuing the temporary stay until the court either denies a motion to dismiss the Horowitz putative securities fraud class action or the Horowitz putative securities fraud class action is dismissed with prejudice.  On April 27, 2012, the federal court entered an order consolidating the stockholder derivative action captioned Himmel v. Robert P. Stiller, et al., with two additional putative derivative actions, Musa Family Revocable Trust v. Robert P. Stiller, et al., Civ. No. 2:12-cv-00029, and Laborers Local 235 Benefit Funds v. Robert P.  Stiller, et al., Civ. No. 2:12-cv- 00042.  On November 14, 2012, the federal court entered an order consolidating an additional stockholder derivative action, captioned Henry Cargo v. Robert P. Stiller, et al., Civ. No. 2:12-cv-00161, and granting plaintiffs leave to lift the stay for the limited purpose of filing a consolidated complaint. 

 

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The consolidated complaint is asserted nominally on behalf of the Company against certain of its officers and directors.  The consolidated complaint asserts claims for breach of fiduciary duty, waste of corporate assets, unjust enrichment, contribution, and indemnification and seeks compensatory damages, injunctive relief, restitution, disgorgement, attorney’s fees, costs, and such other relief as the court should deem just and proper.  On May 14, 2013, the court approved a joint stipulation filed by the parties providing for a temporary stay of the proceedings until the conclusion of the appeal in the Horowitz putative securities fraud class action.  On August 1, 2013, the parties filed a further joint stipulation continuing the temporary stay until the court either denies a motion to dismiss the LAMPERS putative securities fraud class action or the LAMPERS putative securities fraud class action is dismissed with prejudice, which the court approved on August 2, 2013.  On February 24, 2014, the court approved a further joint stipulation filed by the parties continuing the temporary stay until the appeals court rules on the pending appeal in the LAMPERS putative securities fraud class action.

 

The second putative stockholder derivative action, M. Elizabeth Dickinson v. Robert P. Stiller, et al., Civ. No. 818-11-10, is pending in the Superior Court of the State of Vermont for Washington County.  On February 28, 2011, the court approved a stipulation filed by the parties similarly providing for a temporary stay of that action until the federal court rules on defendants’ motions to dismiss the consolidated complaint in the Horowitz putative securities fraud class action.  As a result of the federal court’s ruling in the Horowitz putative securities fraud class action, the temporary stay was lifted.  On June 25, 2013, plaintiff filed an amended complaint in the action, which is asserted nominally on behalf of the Company against certain current and former directors and officers.  The amended complaint is premised on the same allegations alleged in the Horowitz, LAMPERS, and Fifield putative securities fraud class actions.  The amended complaint asserts claims for breach of fiduciary duty, unjust enrichment, waste of corporate assets, and alleged insider selling by certain of the named defendants.  The amended complaint seeks compensatory damages, injunctive relief, restitution, disgorgement, attorneys’ fees, costs, and such other relief as the court should deem just and proper.  On August 7, 2013, the parties filed a further joint stipulation continuing the temporary stay until the court either denies a motion to dismiss the LAMPERS putative securities fraud class action or the LAMPERS putative securities fraud class action is dismissed with prejudice, which the court approved on August 21, 2013.  On April 21, 2014, the court approved a joint stipulation filed by the parties continuing the temporary stay until the appeals court rules on the pending appeal in the LAMPERS putative securities fraud class action, which remains pending with the court for approval.

 

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

 

Antitrust Litigation

 

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

 

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

 

Additionally, beginning on March 10, 2014, twenty-six putative class actions asserting similar claims and seeking similar relief have been filed on behalf of purported direct and indirect purchasers of the Company’s products in various federal district courts.  On March 20, 2014, a motion was filed before the Judicial Panel on Multidistrict Litigation (the “Panel”) to transfer these various actions, including the TreeHouse and JBR actions, to a single judicial district for coordinated or consolidated pre-trial proceedings.  On June 3, 2014, the Panel granted the transfer motion, transferring the actions to the U.S. District Court for the Southern District of New York for coordinated or consolidated pre-trial proceedings.  The actions are now pending before Judge Vernon S. Broderick in the Southern District of New York (In re: Keurig Green Mountain Single-Serve Coffee Antitrust Litigation, No. 1:14-md-02542-VSB).

 

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