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Acquisitions and Divestitures

12 Months Ended

Sep. 29, 2012

3. 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 CBU segment.

As of September 24, 2011, all the assets and liabilities relating to the Filterfresh business were reported in the Consolidated Balance Sheet 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):

	For the period September 25, 2011 through October 3, 2011 (date of sale)		For the period December 17, 2010 (date of acquisition) through September 24, 2011
Net sales	$	2,286	$	90,855

Net income	$	229	$	12,263

Less income attributable to noncontrolling interests	20		1,051
Net income attributable to GMCR	$	209	$	11,212

Diluted net income per share	$	—	$	0.07

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 fiscal 2012, the Company’s sales to Filterfresh through October 3, 2011 (date of sale) that were eliminated in consolidation were $0.6 million. For fiscal 2011, the Company’s sales to Filterfresh during the period December 17, 2010 (date of acquisition) through September 24, 2011 that were eliminated in consolidation were $22.2 million.

Fiscal Year 2011

LJVH Holdings, Inc. (including subsidiaries—Van Houtte)

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 $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 Van Houtte acquisition was accounted for under the acquisition method of accounting. The total purchase price of $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 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 were 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 of Van Houtte 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 fiscal year ended September 24, 2011 and are included in general and administrative expenses for the Company.

Approximately $9.3 million and $26.9 million of the purchase price was held in escrow at September 29, 2012 and September 24, 2011, respectively, and is included in restricted cash. Corresponding amounts of $9.3 million are included in other current liabilities as of September 29, 2012 and $18.0 million and $8.9 million are included in other current liabilities and other long-term liabilities, respectively, as of September 24, 2011.

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 fiscal 2011, the Van Houtte operations contributed an additional $321.4 million of consolidated revenue and $20.2 million of income before income taxes.

Fiscal Year 2010

Diedrich Coffee, Inc.

On May 11, 2010, the Company acquired all of the outstanding common stock of Diedrich Coffee, Inc. (“Diedrich”) a specialty coffee roaster and wholesaler located in central California for approximately $305.3 million, net of cash acquired. The acquisition was financed with cash on hand and a term loan of $140.0 million. Diedrich is a wholly-owned subsidiary of the Company with operations integrated into the SCBU.

The allocation of the purchase price based on the fair value of the acquired assets and liabilities assumed was as follows (in thousands):

Restricted cash	$	623
Accounts receivable	10,361
Inventories	6,732
Deferred income taxes	1,733
Other current assets	2,543
Fixed assets	11,741
Intangibles	100,200
Goodwill	217,519
Other long-term asset	156
Accounts payable	(3,836		)
Accrued compensation costs	(8,670		)
Accrued expenses	(3,480		)
Deferred income taxes, long-term	(30,361		)
Total	$	305,261

Acquisition costs were expensed as incurred and totaled approximately $11.7 million for the fiscal year ended September 25, 2010 and are included in general and administrative expenses of the Company.

Amortizable intangible assets acquired include approximately $83.3 million for customer relationships and $16.9 million for product names. The weighted-average amortization period for these assets is 10 years and is amortized on a straight-line basis over their respective useful lives.

The cost of the acquisition in excess of the fair market value of assets acquired less liabilities assumed represents acquired goodwill of approximately $217.5 million. The acquisition provides the Company with an expanded West Coast presence and manufacturing and distribution synergies, which provide the basis of goodwill recognized. Goodwill and intangible assets related to this acquisition are reported in the SCBU segment of the Company. The goodwill and intangible assets recognized are not deductible for tax purposes.

The acquisition was completed on May 11, 2010 and accordingly results of operations from such date have been included in the Company’s Statement of Operations. Effective September 26, 2010, the beginning of the Company’s fiscal year 2011, Diedrich was migrated onto the Company’s common information technology platform. As a result, it is impracticable to disclose separately Diedrich’s contributions to revenue and income before taxes for fiscal 2011. For fiscal year 2010, Diedrich contributed approximately $16.6 million in revenue and $4.1 million of income before taxes.

Timothy’s Coffee of the World Inc.

On November 13, 2009, the Company acquired all of the outstanding capital stock of Timothy’s Coffee of the World Inc. (“Timothy’s”), which included its brand and wholesale coffee business. Timothy’s is as a wholly-owned Canadian subsidiary, with operations, at the time of acquisition, integrated into the SCBU segment. Timothy’s functional currency is the U.S. dollar.

Total consideration under the terms of the share purchase agreement amounted to approximately USD $155.7 million. The share purchase agreement contained customary representations, warranties and covenants given by the parties. The total cash disbursement was $154.2 million and the Company assumed liabilities of $1.5 million which were recorded as a noncash transaction.

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

Accounts receivable	$	8,732
Inventory	6,911
Other current assets	83
Fixed assets	7,827
Intangibles	98,300
Goodwill	69,297
Accounts payable	(6,852		)
Accrued compensation costs	(132		)
Accrued expenses	(966		)
Capital lease	(186		)
Deferred income taxes	(27,274		)
Total	$	155,740

Acquisition costs were expensed as incurred and totaled approximately $1.9 million for the fiscal year ended September 25, 2010 and are included in general and administrative expenses of the Company.

Amortizable intangible assets acquired include approximately $83.2 million for customer relationships with an estimated life of 16 years, approximately $8.9 million for the Timothy’s trade name with an estimated life of 11 years and approximately $6.2 million for supply agreements with an estimated life of 11 years. The weighted-average amortization period for these assets is 15.2 years and is amortized on a straight-line basis over their respective useful lives.

The cost of the acquisition in excess of the fair market value of assets acquired less liabilities assumed represents acquired goodwill of approximately $69.3 million. The acquisition provided the Company with a Canadian presence and manufacturing and distribution synergies, which provide the basis of goodwill recognized. Goodwill and intangible assets related to this acquisition are reported in the SCBU segment. The goodwill recognized is not deductible for tax purposes.

The acquisition was completed on November 13, 2009 and accordingly results of operations from such date have been included in the Company’s Statement of Operations. Effective September 25, 2011, the beginning of the Company’s fiscal year 2012, the sales and operations associated with Timothy’s were included in the CBU segment. For fiscal 2011, the Timothy’s operations contributed an additional $68.3 million of consolidated revenue and $28.6 million of income before taxes. For fiscal 2010, Timothy’s contributed approximately $37.9 million in revenue and $14.7 million of income before taxes.

Supplemental Pro Forma Information

The following information reflects the Company’s acquisitions as if the transactions had occurred as of the beginning of the Company’s fiscal 2010. The unaudited 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 unaudited consolidated pro forma data (in thousands):

	Fiscal 2011		Fiscal 2010
Unaudited Consolidated proforma revenue	$	2,749,729	$	1,765,368
Unaudited Consolidated proforma net income	$	223,854	$	84,840
Unaudited Consolidated proforma diluted earnings per common share	$	1.47	$	0.62