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 29, 2013
OR
o |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the transition period from to
Commission file number 1-12340
GREEN MOUNTAIN COFFEE ROASTERS, INC.
(Exact name of registrant as specified in its charter)
Delaware |
|
03-0339228 |
(State or other jurisdiction of incorporation or organization) |
|
(I.R.S. Employer Identification No.) |
33 Coffee Lane, Waterbury, Vermont 05676
(Address of principal executive offices) (zip code)
(802) 244-5621
(Registrants telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report.)
Indicate by check mark whether the registrant has (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES x NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer x |
|
Accelerated filer o |
|
|
|
Non-accelerated filer o |
|
Smaller Reporting Company o |
Indicate by check mark whether the Registrant is a shell company (as defined in rule 12b-2 of the Exchange Act) YES o NO x
As of August 1, 2013, 150,739,161 shares of common stock of the registrant were outstanding.
GREEN MOUNTAIN COFFEE ROASTERS, INC.
Form 10-Q
For the Thirteen Weeks Ended June 29, 2013
|
|
Page |
1 | ||
1 | ||
|
2 | |
|
3 | |
|
4 | |
|
Unaudited Consolidated Statements of Changes in Stockholders Equity |
6 |
|
7 | |
|
8 | |
Managements Discussion and Analysis of Financial Condition and Results of Operations |
26 | |
41 | ||
42 | ||
|
|
|
43 | ||
43 | ||
45 | ||
45 | ||
45 | ||
47 |
GREEN MOUNTAIN COFFEE ROASTERS, INC.
Unaudited Consolidated Balance Sheets
(Dollars in thousands, except per share data)
|
|
June 29, |
|
September 29, |
| ||
Assets |
|
|
|
|
| ||
Current assets: |
|
|
|
|
| ||
Cash and cash equivalents |
|
$ |
352,205 |
|
$ |
58,289 |
|
Restricted cash and cash equivalents |
|
713 |
|
12,884 |
| ||
Receivables, less uncollectible accounts and return allowances of $27,649 and $34,517 at June 29, 2013 and September 29, 2012, respectively |
|
333,593 |
|
363,771 |
| ||
Inventories |
|
586,263 |
|
768,437 |
| ||
Income taxes receivable |
|
2,157 |
|
32,943 |
| ||
Other current assets |
|
70,410 |
|
35,019 |
| ||
Deferred income taxes, net |
|
51,628 |
|
51,613 |
| ||
Total current assets |
|
1,396,969 |
|
1,322,956 |
| ||
|
|
|
|
|
| ||
Fixed assets, net |
|
973,246 |
|
944,296 |
| ||
Intangibles, net |
|
439,035 |
|
498,352 |
| ||
Goodwill |
|
779,639 |
|
808,076 |
| ||
Deferred income taxes, net |
|
272 |
|
|
| ||
Other long-term assets |
|
34,222 |
|
42,109 |
| ||
|
|
|
|
|
| ||
Total assets |
|
$ |
3,623,383 |
|
$ |
3,615,789 |
|
|
|
|
|
|
| ||
Liabilities and Stockholders Equity |
|
|
|
|
| ||
Current liabilities: |
|
|
|
|
| ||
Current portion of long-term debt |
|
$ |
9,789 |
|
$ |
6,691 |
|
Current portion of capital lease and financing obligations |
|
3,380 |
|
3,057 |
| ||
Accounts payable |
|
227,036 |
|
279,577 |
| ||
Accrued compensation costs |
|
73,431 |
|
38,458 |
| ||
Accrued expenses |
|
145,999 |
|
132,992 |
| ||
Income tax payable |
|
|
|
29,322 |
| ||
Deferred income taxes, net |
|
229 |
|
245 |
| ||
Other current liabilities |
|
12,960 |
|
29,645 |
| ||
Total current liabilities |
|
472,824 |
|
519,987 |
| ||
|
|
|
|
|
| ||
Long-term debt, less current portion |
|
228,296 |
|
466,984 |
| ||
Capital lease and financing obligations, less current portion |
|
75,801 |
|
54,794 |
| ||
Deferred income taxes, net |
|
271,765 |
|
270,348 |
| ||
Other long-term liabilities |
|
23,858 |
|
32,544 |
| ||
|
|
|
|
|
| ||
Commitments and contingencies |
|
|
|
|
| ||
|
|
|
|
|
| ||
Redeemable noncontrolling interests |
|
10,238 |
|
9,904 |
| ||
|
|
|
|
|
| ||
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 - 150,526,269 and 152,680,855 shares at June 29, 2013 and September 29, 2012, respectively |
|
15,053 |
|
15,268 |
| ||
Additional paid-in capital |
|
1,430,104 |
|
1,464,560 |
| ||
Retained earnings |
|
1,126,164 |
|
771,200 |
| ||
Accumulated other comprehensive (loss) income |
|
(30,720 |
) |
10,200 |
| ||
Total stockholders equity |
|
2,540,601 |
|
2,261,228 |
| ||
|
|
|
|
|
| ||
Total liabilities and stockholders equity |
|
$ |
3,623,383 |
|
$ |
3,615,789 |
|
The accompanying Notes to the Unaudited Consolidated Financial Statements are an integral part of these interim financial statements.
GREEN MOUNTAIN COFFEE ROASTERS, INC.
Unaudited Consolidated Statements of Operations
(Dollars in thousands, except per share data)
|
|
Thirteen weeks ended |
|
Thirty-nine weeks ended |
| ||||||||
|
|
June 29, |
|
June 23, |
|
June 29, |
|
June 23, |
| ||||
Net sales |
|
$ |
967,072 |
|
$ |
869,194 |
|
$ |
3,310,923 |
|
$ |
2,912,462 |
|
Cost of sales |
|
559,454 |
|
565,883 |
|
2,068,996 |
|
1,959,509 |
| ||||
Gross profit |
|
407,618 |
|
303,311 |
|
1,241,927 |
|
952,953 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Selling and operating expenses |
|
136,742 |
|
117,982 |
|
433,368 |
|
370,445 |
| ||||
General and administrative expenses |
|
77,532 |
|
55,601 |
|
220,670 |
|
157,349 |
| ||||
Operating income |
|
193,344 |
|
129,728 |
|
587,889 |
|
425,159 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Other income, net |
|
237 |
|
229 |
|
652 |
|
1,589 |
| ||||
Gain (loss) on financial instruments, net |
|
4,419 |
|
3,032 |
|
8,994 |
|
(214 |
) | ||||
(Loss) gain on foreign currency, net |
|
(10,391 |
) |
(5,068 |
) |
(19,185 |
) |
1,231 |
| ||||
Gain on sale of subsidiary |
|
|
|
|
|
|
|
26,311 |
| ||||
Interest expense |
|
(3,937 |
) |
(6,157 |
) |
(13,481 |
) |
(18,662 |
) | ||||
Income before income taxes |
|
183,672 |
|
121,764 |
|
564,869 |
|
435,414 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Income tax expense |
|
(67,226 |
) |
(48,244 |
) |
(207,907 |
) |
(163,949 |
) | ||||
Net income |
|
$ |
116,446 |
|
$ |
73,520 |
|
$ |
356,962 |
|
$ |
271,465 |
|
|
|
|
|
|
|
|
|
|
| ||||
Net income attributable to noncontrolling interests |
|
174 |
|
224 |
|
686 |
|
724 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net income attributable to GMCR |
|
$ |
116,272 |
|
$ |
73,296 |
|
$ |
356,276 |
|
$ |
270,741 |
|
|
|
|
|
|
|
|
|
|
| ||||
Basic income per share: |
|
|
|
|
|
|
|
|
| ||||
Basic weighted average shares outstanding |
|
149,825,581 |
|
155,459,690 |
|
149,307,144 |
|
155,071,117 |
| ||||
Net income per common share - basic |
|
$ |
0.78 |
|
$ |
0.47 |
|
$ |
2.39 |
|
$ |
1.75 |
|
|
|
|
|
|
|
|
|
|
| ||||
Diluted income per share: |
|
|
|
|
|
|
|
|
| ||||
Diluted weighted average shares outstanding |
|
152,869,392 |
|
159,299,578 |
|
152,647,767 |
|
159,364,440 |
| ||||
Net income per common share - diluted |
|
$ |
0.76 |
|
$ |
0.46 |
|
$ |
2.33 |
|
$ |
1.70 |
|
The accompanying Notes to the Unaudited Consolidated Financial Statements are an integral part of these interim financial statements.
GREEN MOUNTAIN COFFEE ROASTERS, INC.
Unaudited Consolidated Statements of Comprehensive Income
(Dollars in thousands)
|
|
Thirteen weeks ended |
|
Thirteen weeks ended |
| ||||||||||||||
|
|
June 29, 2013 |
|
June 23, 2012 |
| ||||||||||||||
|
|
Pre-tax |
|
Tax (expense) |
|
After-tax |
|
Pre-tax |
|
Tax (expense) |
|
After-tax |
| ||||||
Net income |
|
|
|
|
|
$ |
116,446 |
|
|
|
|
|
$ |
73,520 |
| ||||
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Cash flow hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Unrealized losses arising during the period |
|
$ |
(1,694 |
) |
$ |
684 |
|
$ |
(1,010 |
) |
$ |
(904 |
) |
$ |
364 |
|
$ |
(540 |
) |
Losses (gains) reclassified to net income |
|
394 |
|
(159 |
) |
235 |
|
(440 |
) |
177 |
|
(263 |
) | ||||||
Foreign currency translation adjustments |
|
(20,689 |
) |
|
|
(20,689 |
) |
(14,278 |
) |
|
|
(14,278 |
) | ||||||
Other comprehensive (loss) income |
|
$ |
(21,989 |
) |
$ |
525 |
|
$ |
(21,464 |
) |
$ |
(15,622 |
) |
$ |
541 |
|
$ |
(15,081 |
) |
Total comprehensive income |
|
|
|
|
|
94,982 |
|
|
|
|
|
58,439 |
| ||||||
Total comprehensive loss attributable to noncontrolling interests |
|
|
|
|
|
(349 |
) |
|
|
|
|
(64 |
) | ||||||
Total comprehensive income attributable to GMCR |
|
|
|
|
|
$ |
95,331 |
|
|
|
|
|
$ |
58,503 |
|
The accompanying Notes to the Unaudited Consolidated Financial Statements are an integral part of these interim financial statements.
GREEN MOUNTAIN COFFEE ROASTERS, INC.
Unaudited Consolidated Statements of Comprehensive Income
(Dollars in thousands)
|
|
Thirty-nine weeks ended |
|
Thirty-nine weeks ended |
| ||||||||||||||
|
|
June 29, 2013 |
|
June 23, 2012 |
| ||||||||||||||
|
|
Pre-tax |
|
Tax (expense) |
|
After-tax |
|
Pre-tax |
|
Tax (expense) |
|
After-tax |
| ||||||
Net income |
|
|
|
|
|
$ |
356,962 |
|
|
|
|
|
$ |
271,465 |
| ||||
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Cash flow hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Unrealized losses arising during the period |
|
$ |
(972 |
) |
$ |
393 |
|
$ |
(579 |
) |
$ |
(1,634 |
) |
$ |
659 |
|
$ |
(975 |
) |
Losses (gains) reclassified to net income |
|
1,122 |
|
(453 |
) |
669 |
|
(106 |
) |
42 |
|
(64 |
) | ||||||
Foreign currency translation adjustments |
|
(42,044 |
) |
|
|
(42,044 |
) |
1,931 |
|
|
|
1,931 |
| ||||||
Other comprehensive (loss) income |
|
$ |
(41,894 |
) |
$ |
(60 |
) |
$ |
(41,954 |
) |
$ |
191 |
|
$ |
701 |
|
$ |
892 |
|
Total comprehensive income |
|
|
|
|
|
315,008 |
|
|
|
|
|
272,357 |
| ||||||
Total comprehensive (loss) income attributable to noncontrolling interests |
|
|
|
|
|
(348 |
) |
|
|
|
|
769 |
| ||||||
Total comprehensive income attributable to GMCR |
|
|
|
|
|
$ |
315,356 |
|
|
|
|
|
$ |
271,588 |
|
The accompanying Notes to the Unaudited Consolidated Financial Statements are an integral part of these interim financial statements.
GREEN MOUNTAIN COFFEE ROASTERS, INC.
Unaudited Consolidated Statement of Changes in Stockholders Equity
For the Thirty-nine Weeks Ended June 29, 2013
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
other |
|
|
| |||||
|
|
Common stock |
|
Additional paid-in |
|
Retained |
|
comprehensive |
|
Stockholders |
| |||||||
|
|
Shares |
|
Amount |
|
capital |
|
earnings |
|
income (loss) |
|
equity |
| |||||
Balance at September 29, 2012 |
|
152,680,855 |
|
$ |
15,268 |
|
$ |
1,464,560 |
|
$ |
771,200 |
|
$ |
10,200 |
|
$ |
2,261,228 |
|
Options exercised |
|
2,441,353 |
|
244 |
|
16,269 |
|
|
|
|
|
16,513 |
| |||||
Issuance of common stock under employee stock purchase plan |
|
247,593 |
|
25 |
|
5,227 |
|
|
|
|
|
5,252 |
| |||||
Restricted stock awards and units |
|
21,061 |
|
2 |
|
(2 |
) |
|
|
|
|
|
| |||||
Repurchase of common stock |
|
(4,864,593 |
) |
(486 |
) |
(125,195 |
) |
|
|
|
|
(125,681 |
) | |||||
Stock compensation expense |
|
|
|
|
|
21,203 |
|
|
|
|
|
21,203 |
| |||||
Tax benefit from equity-based compensation plans |
|
|
|
|
|
47,852 |
|
|
|
|
|
47,852 |
| |||||
Deferred compensation expense |
|
|
|
|
|
190 |
|
|
|
|
|
190 |
| |||||
Adjustment of redeemable noncontrolling interests to redemption value |
|
|
|
|
|
|
|
(1,312 |
) |
|
|
(1,312 |
) | |||||
Other comprehensive income (loss), net of tax |
|
|
|
|
|
|
|
|
|
(40,920 |
) |
(40,920 |
) | |||||
Net income |
|
|
|
|
|
|
|
356,276 |
|
|
|
356,276 |
| |||||
Balance at June 29, 2013 |
|
150,526,269 |
|
$ |
15,053 |
|
$ |
1,430,104 |
|
$ |
1,126,164 |
|
$ |
(30,720 |
) |
$ |
2,540,601 |
|
The accompanying Notes to the Unaudited Consolidated Financial Statements are an integral part of these interim financial statements.
GREEN MOUNTAIN COFFEE ROASTERS, INC.
Unaudited Consolidated Statements of Cash Flows
(Dollars in thousands)
|
|
Thirty-nine |
|
Thirty-nine |
| ||
|
|
weeks ended |
|
weeks ended |
| ||
|
|
June 29, |
|
June 23, |
| ||
Cash flows from operating activities: |
|
|
|
|
| ||
Net income |
|
$ |
356,962 |
|
$ |
271,465 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
| ||
Depreciation and amortization of fixed assets |
|
137,734 |
|
89,221 |
| ||
Amortization of intangibles |
|
34,234 |
|
34,496 |
| ||
Amortization of deferred financing fees |
|
4,538 |
|
4,538 |
| ||
Unrealized loss (gain) on foreign currency, net |
|
15,555 |
|
(535 |
) | ||
Loss on disposal of fixed assets |
|
222 |
|
2,103 |
| ||
Gain on sale of subsidiary, excluding transaction costs |
|
|
|
(28,914 |
) | ||
Provision for doubtful accounts |
|
68 |
|
2,084 |
| ||
Provision for sales returns |
|
59,209 |
|
83,170 |
| ||
(Gain) loss on derivatives, net |
|
(7,872 |
) |
112 |
| ||
Excess tax benefits from equity-based compensation plans |
|
(47,845 |
) |
(12,449 |
) | ||
Deferred income taxes |
|
8,794 |
|
13,198 |
| ||
Deferred compensation and stock compensation |
|
21,393 |
|
13,811 |
| ||
Other |
|
881 |
|
4 |
| ||
Changes in assets and liabilities: |
|
|
|
|
| ||
Receivables |
|
(32,732 |
) |
(37,895 |
) | ||
Inventories |
|
175,532 |
|
6,464 |
| ||
Income tax receivable/payable, net |
|
48,905 |
|
91,032 |
| ||
Other current assets |
|
(34,634 |
) |
4,014 |
| ||
Other long-term assets, net |
|
3,311 |
|
(608 |
) | ||
Accounts payable, accrued expenses and accrued compensation costs |
|
39,082 |
|
(48,813 |
) | ||
Other current liabilities |
|
(2,469 |
) |
(3,909 |
) | ||
Other long-term liabilities |
|
(8,633 |
) |
5,593 |
| ||
Net cash provided by operating activities |
|
772,235 |
|
488,182 |
| ||
|
|
|
|
|
| ||
Cash flows from investing activities: |
|
|
|
|
| ||
Change in restricted cash |
|
2,852 |
|
(461 |
) | ||
Proceeds from sale of subsidiary, net of cash transferred |
|
|
|
137,733 |
| ||
Capital expenditures for fixed assets |
|
(190,388 |
) |
(305,532 |
) | ||
Other investing activities |
|
501 |
|
580 |
| ||
Net cash used in investing activities |
|
(187,035 |
) |
(167,680 |
) | ||
|
|
|
|
|
| ||
Cash flows from financing activities: |
|
|
|
|
| ||
Net change in revolving line of credit |
|
(226,210 |
) |
(208,678 |
) | ||
Proceeds from issuance of common stock under compensation plans |
|
21,764 |
|
8,392 |
| ||
Repurchase of common stock |
|
(125,681 |
) |
|
| ||
Excess tax benefits from equity-based compensation plans |
|
47,845 |
|
12,449 |
| ||
Payments on capital lease and financing obligations |
|
(2,596 |
) |
(4,255 |
) | ||
Repayment of long-term debt |
|
(6,640 |
) |
(6,231 |
) | ||
Other financing activities |
|
(1,006 |
) |
(513 |
) | ||
Net cash used in financing activities |
|
(292,524 |
) |
(198,836 |
) | ||
|
|
|
|
|
| ||
Change in cash balances included in current assets held for sale |
|
|
|
5,160 |
| ||
|
|
|
|
|
| ||
Effect of exchange rate changes on cash and cash equivalents |
|
1,240 |
|
(827 |
) | ||
|
|
|
|
|
| ||
Net increase in cash and cash equivalents |
|
293,916 |
|
125,999 |
| ||
Cash and cash equivalents at beginning of period |
|
58,289 |
|
12,989 |
| ||
Cash and cash equivalents at end of period |
|
$ |
352,205 |
|
$ |
138,988 |
|
|
|
|
|
|
| ||
Supplemental disclosures of cash flow information: |
|
|
|
|
| ||
Fixed asset purchases included in accounts payable and not disbursed at the end of each period |
|
$ |
17,998 |
|
$ |
34,293 |
|
Noncash investing and financing activities: |
|
|
|
|
| ||
Fixed assets acquired under capital lease and financing obligations |
|
$ |
23,461 |
|
$ |
44,174 |
|
Settlement of acquisition related liabilities through release of restricted cash |
|
$ |
9,227 |
|
$ |
18,788 |
|
The accompanying Notes to the Unaudited Consolidated Financial Statements are an integral part of these interim financial statements.
Green Mountain Coffee Roasters, Inc.
Notes to Unaudited Consolidated Financial Statements
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information, the instructions to Form 10-Q, and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete consolidated financial statements.
In the opinion of management, all adjustments considered necessary for a fair statement of the interim financial data have been included. Results from operations for the thirteen and thirty-nine week periods ended June 29, 2013 are not necessarily indicative of the results that may be expected for the fiscal year ending September 28, 2013.
The September 29, 2012 balance sheet data was derived from audited financial statements but does not include all disclosures required by GAAP. For further information, refer to the consolidated financial statements and the footnotes included in the Annual Report on Form 10-K for Green Mountain Coffee Roasters, Inc. for the fiscal year ended September 29, 2012. Throughout this presentation, we refer to the consolidated company as the Company and, unless otherwise noted, the information provided is on a consolidated basis.
2. Recent Accounting Pronouncements
In March 2013, the Financial Accounting Standards Board (the FASB) issued an Accounting Standards Update (ASU) No. 2013-05, Foreign Currency Matters (Topic 830): Parents 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 are effective prospectively for reporting periods beginning after December 15, 2013, and early adoption is permitted. The adoption of ASU 2013-05 is not expected to have an impact on the Companys 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 are effective for reporting periods beginning after December 15, 2013, with early adoption permitted. Retrospective application is required. The adoption of ASU 2013-04 is not expected to have a material impact on the Companys net income, financial position or cash flows.
In February 2013, the FASB issued ASU No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Comprehensive Income (ASU 2013-02). ASU 2013-02 requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under GAAP to be reclassified in its entirety to net income. For significant items not reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures that provide additional detail about those amounts. The amendments in this ASU are effective for annual reporting periods, and interim periods within those annual reporting periods, beginning after December 15, 2012, which for the Company will be the first quarter of fiscal 2014. The adoption of ASU 2013-02 is not expected to have an impact on the Companys net income, financial position or cash flows.
In December 2011, the FASB issued ASU No. 2011-11, Disclosures about Offsetting Assets and Liabilities, (ASU 2011-11) that provides amendments for disclosures about offsetting assets and liabilities. The amendments require an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. Entities are required to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement.
On January 31, 2013, the FASB issued ASU No. 2013-01, Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities, which clarified that the scope of the disclosures is limited to include derivatives, sale and repurchase agreements and reverse sale and repurchase agreements, and securities borrowing and securities lending arrangements. The amendments are effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. Disclosures required by the amendments should be provided retrospectively for all comparative periods presented. For the Company, the amendments are effective for the fiscal year ending September 27, 2014 (fiscal year 2014). The Company has not adopted the amendments and is currently evaluating the impact these amendments may have on its disclosures.
3. Divestiture
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 Canada segment.
Filterfresh revenues and net income included in the Companys Unaudited Consolidated Statements of Operations were as follows (dollars in thousands, except per share data):
|
|
For the period |
| |
Net sales |
|
$ |
2,286 |
|
|
|
|
| |
Net income |
|
$ |
229 |
|
Less income attributable to noncontrolling interests |
|
20 |
| |
Net income attributable to GMCR |
|
$ |
209 |
|
|
|
|
| |
Diluted net income per share |
|
$ |
0.00 |
|
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 Unaudited Consolidated Statements of Operations. The Companys sales to Filterfresh for the period September 25, 2011 through October 3, 2011 (date of sale) that were eliminated in consolidation were $0.6 million.
4. Segment Reporting
The Company has historically managed its operations through three business segments: the Specialty Coffee business unit (SCBU), the Keurig business unit (KBU) and the Canadian business unit. Effective as of and as initially disclosed on May 8, 2013, the Companys Board of Directors authorized and approved a reorganization which consolidated U.S. operations to bring greater organizational efficiency and coordination across the Company. Due to this combination, the results of U.S. operations, formerly reported in the SCBU and KBU segments, are reported in one segment (Domestic) and the results of Canadian operations are reported in the Canada segment. The Companys Chief Executive Officer (CEO) serves as the Companys chief operating decision maker (CODM) and there are two operating and reportable segments, Domestic and Canada.
Effective for the quarter ended June 29, 2013, as a result of the consolidation of U.S. operations, the Company has recast all historical segment results in order to provide data that is on a basis consistent with the Companys new structure, remove total assets from the Companys segment disclosures as only consolidated asset information is provided to and used by the CODM for use in decision making (in connection with the reorganization, segment asset information is neither provided to nor used by the CODM), and reflect all corporate social responsibility expenses in Corporate as the Company no longer allocates those expenses to its operating segments.
The Company distributes its products in two channels: at-home (AH) and away-from-home (AFH).
The Domestic segment sells single cup brewers, accessories, and sources, produces and sells coffee, hot cocoa, teas and other beverages in K-Cup® and Vue® packs (single serve 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. Substantially all of the Domestic segments distribution to major retailers is processed by 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 K-Cup® packs sold by a third party licensed roaster.
The Canada segment sources, produces and sells coffees and teas and other beverages in a variety of packaging formats, including K-Cup® packs, and coffee in more traditional packaging such as bags, cans and fractional packs, and under a variety of brands. The varieties are sold primarily to supermarkets, club stores and, through office coffee services to offices, convenience stores and restaurants throughout Canada. In addition, the Canada segment sells the Keurig® K-Cup® Single Cup brewers, accessories and coffee, tea, and other beverages in K-Cup® packs to retailers, department stores and mass merchandisers in Canada for the AH channels; manufactures certain brewing equipment; and is responsible for all of the Companys coffee brand sales in the grocery channel in Canada. The Canada segment included Filterfresh through October 3, 2011, the date of sale (see Note 3, Divestitures).
Management evaluates the performance of the Companys 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 Companys 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 Companys 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 social responsibility 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. The Company does not disclose assets or property additions by segment as only consolidated asset information is provided to the CODM for use in decision making.
Effective for the first quarter of fiscal 2013, the Company changed its measure for reporting segment profitability and for evaluating segment performance and the allocation of Company resources from income before taxes to operating income (loss). Prior to the first quarter of fiscal 2013, the Company disclosed each operating and reporting segments income before taxes to report segment profitability. Segment disclosures for prior periods have been recast to reflect operating income by segment in place of income before taxes. The CODM measures segment performance based upon operating income which excludes interest expense and interest expense is not provided to the CODM by segment. Accordingly, interest expense by segment is no longer presented.
Sales between operating segments are transacted at cost. As a result, intersegment sales have no impact on operating income and effective for the first quarter of fiscal 2013, the Company no longer discloses intersegment sales. Net sales for the thirteen and thirty-nine weeks ended June 29, 2013 and comparative historical periods include only net sales to external customers.
The following tables summarize selected financial data for segment disclosures for the thirteen and thirty-nine weeks ended June 29, 2013 and June 23, 2012:
|
|
Thirteen weeks ended June 29, 2013 |
| ||||||||||
|
|
(Dollars in thousands) |
| ||||||||||
|
|
Domestic |
|
Canada |
|
Corporate |
|
Consolidated |
| ||||
Net sales |
|
$ |
822,593 |
|
$ |
144,479 |
|
$ |
|
|
$ |
967,072 |
|
|
|
|
|
|
|
|
|
|
| ||||
Operating income (loss) |
|
$ |
213,076 |
|
$ |
23,658 |
|
$ |
(43,390 |
) |
$ |
193,344 |
|
|
|
|
|
|
|
|
|
|
| ||||
Stock compensation |
|
$ |
2,615 |
|
$ |
515 |
|
$ |
3,001 |
|
$ |
6,131 |
|
|
|
|
|
|
|
|
|
|
| ||||
Depreciation and amortization |
|
$ |
44,083 |
|
$ |
16,501 |
|
$ |
625 |
|
$ |
61,209 |
|
|
|
Thirteen weeks ended June 23, 2012 |
| ||||||||||
|
|
(Dollars in thousands) |
| ||||||||||
|
|
Domestic |
|
Canada |
|
Corporate |
|
Consolidated |
| ||||
Net sales |
|
$ |
719,771 |
|
$ |
149,423 |
|
$ |
|
|
$ |
869,194 |
|
|
|
|
|
|
|
|
|
|
| ||||
Operating income (loss) |
|
$ |
125,368 |
|
$ |
21,933 |
|
$ |
(17,573 |
) |
$ |
129,728 |
|
|
|
|
|
|
|
|
|
|
| ||||
Stock compensation |
|
$ |
2,011 |
|
$ |
379 |
|
$ |
2,030 |
|
$ |
4,420 |
|
|
|
|
|
|
|
|
|
|
| ||||
Depreciation and amortization(1) |
|
$ |
29,452 |
|
$ |
15,421 |
|
$ |
1 |
|
$ |
44,874 |
|
(1) Reported segment depreciation and amortization has been revised to reflect depreciation expense for Information Systems Technology (IST) equipment that was allocated to operating segments in each segments income before taxes. In the Companys Quarterly Report on Form 10-Q for the thirteen weeks ended June 23, 2012, filed on August 1, 2012, IST equipment depreciation expense was appropriately allocated, recorded and reported on a consolidated basis and in each operating segments income before taxes; however, on the depreciation and amortization line, IST equipment depreciation of $5.3 million that should have been reported under the operating segments was reported in Corporate. The historical issues with the depreciation and amortization lines did not impact the segment reporting for any other line items, including operating income. Management believes the revision to operating segments depreciation and amortization was not material.
|
|
Thirty-nine weeks ended June 29, 2013 |
| ||||||||||
|
|
(Dollars in thousands) |
| ||||||||||
|
|
Domestic |
|
Canada |
|
Corporate |
|
Consolidated |
| ||||
Net Sales |
|
$ |
2,820,123 |
|
$ |
490,800 |
|
$ |
|
|
$ |
3,310,923 |
|
|
|
|
|
|
|
|
|
|
| ||||
Operating income (loss) |
|
$ |
644,024 |
|
$ |
69,855 |
|
$ |
(125,990 |
) |
$ |
587,889 |
|
|
|
|
|
|
|
|
|
|
| ||||
Stock compensation |
|
$ |
7,808 |
|
$ |
1,870 |
|
$ |
11,525 |
|
$ |
21,203 |
|
|
|
|
|
|
|
|
|
|
| ||||
Depreciation and amortization |
|
$ |
121,675 |
|
$ |
48,938 |
|
$ |
1,355 |
|
$ |
171,968 |
|
|
|
Thirty-nine weeks ended June 23, 2012 |
| ||||||||||
|
|
(Dollars in thousands) |
| ||||||||||
|
|
Domestic |
|
Canada |
|
Corporate |
|
Consolidated |
| ||||
Net Sales |
|
$ |
2,437,935 |
|
$ |
474,527 |
|
$ |
|
|
$ |
2,912,462 |
|
|
|
|
|
|
|
|
|
|
| ||||
Operating income (loss) |
|
$ |
423,228 |
|
$ |
60,327 |
|
$ |
(58,396 |
) |
$ |
425,159 |
|
|
|
|
|
|
|
|
|
|
| ||||
Stock compensation |
|
$ |
6,147 |
|
$ |
1,504 |
|
$ |
5,978 |
|
$ |
13,629 |
|
|
|
|
|
|
|
|
|
|
| ||||
Depreciation and amortization(1) |
|
$ |
78,963 |
|
$ |
44,751 |
|
$ |
3 |
|
$ |
123,717 |
|
(1) Reported segment depreciation and amortization has been revised to reflect depreciation expense for IST equipment that was allocated to operating segments in each segments income before taxes. In the Companys Quarterly Report on Form 10-Q for the thirteen weeks ended June 23, 2012, filed on August 1, 2012, IST equipment depreciation expense was appropriately allocated, recorded and reported on a consolidated basis and in each operating segments income before taxes; however, on the depreciation and amortization line, IST equipment depreciation of $14.4 million for the thirty-nine weeks ended June 23, 2012 that should have been reported under the operating segments was reported in Corporate. The historical issues with the depreciation and amortization lines did not impact the segment reporting for any other line items, including operating income. Management believes the revision to operating segments depreciation and amortization was not material.
The following table reconciles the total segment operating income 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 29, 2013 |
|
June 23, 2012 |
|
June 29, 2013 |
|
June 23, 2012 |
| ||||
Operating income |
|
$ |
193,344 |
|
$ |
129,728 |
|
$ |
587,889 |
|
$ |
425,159 |
|
Other income, net |
|
237 |
|
229 |
|
652 |
|
1,589 |
| ||||
Gain (loss) on financial instruments, net |
|
4,419 |
|
3,032 |
|
8,994 |
|
(214 |
) | ||||
(Loss) gain on foreign currency, net |
|
(10,391 |
) |
(5,068 |
) |
(19,185 |
) |
1,231 |
| ||||
Gain on sale of subsidiary |
|
|
|
|
|
|
|
26,311 |
| ||||
Interest expense |
|
(3,937 |
) |
(6,157 |
) |
(13,481 |
) |
(18,662 |
) | ||||
Income before income taxes |
|
$ |
183,672 |
|
$ |
121,764 |
|
$ |
564,869 |
|
$ |
435,414 |
|
5. Inventories
Inventories consisted of the following (in thousands) as of:
|
|
June 29, |
|
September 29, |
| ||
Raw materials and supplies |
|
$ |
177,843 |
|
$ |
229,927 |
|
Finished goods |
|
408,420 |
|
538,510 |
| ||
|
|
$ |
586,263 |
|
$ |
768,437 |
|
At June 29, 2013, the Company had approximately $270.4 million in green coffee purchase commitments, of which approximately 86% had a fixed price. These commitments primarily extend through fiscal 2014. The value of the variable portion of these commitments was calculated using an average C price of coffee of $1.28 per pound at June 29, 2013. In addition to its green coffee commitments, the Company had approximately $305.0 million in fixed price brewer and related accessory purchase commitments and $508.1 million in production raw material commitments at June 29, 2013. The Company believes, based on relationships established with its suppliers, that the risk of non-delivery on such purchase commitments is remote.
As of June 29, 2013, minimum future inventory purchase commitments were as follows (in thousands):
Fiscal Year |
|
Inventory |
| |
Remainder of 2013 |
|
$ |
484,313 |
|
2014 |
|
227,529 |
| |
2015 |
|
106,311 |
| |
2016 |
|
109,635 |
| |
2017 |
|
84,465 |
| |
Thereafter |
|
79,577 |
| |
|
|
$ |
1,091,830 |
|
In order to ensure a continuous supply of high quality raw materials some of the Companys inventory purchase obligations include long-term purchase commitments for certain strategic raw materials critical for the manufacture of single serve packs.
6. Fixed Assets
Fixed assets consisted of the following (in thousands) as of:
|
|
Useful Life in Years |
|
June 29, |
|
September 29, |
| ||
Production equipment |
|
1-15 |
|
$ |
638,728 |
|
$ |
544,491 |
|
Coffee service equipment |
|
3-7 |
|
62,071 |
|
63,722 |
| ||
Computer equipment and software |
|
1-6 |
|
142,155 |
|
111,441 |
| ||
Land |
|
Indefinite |
|
11,426 |
|
11,740 |
| ||
Building and building improvements |
|
4-30 |
|
129,764 |
|
83,172 |
| ||
Furniture and fixtures |
|
1-15 |
|
32,741 |
|
28,477 |
| ||
Vehicles |
|
4-5 |
|
11,239 |
|
10,306 |
| ||
Leasehold improvements |
|
1-20 or remaining life of lease, whichever is less |
|
92,433 |
|
72,755 |
| ||
Assets acquired under capital leases |
|
5-15 |
|
51,047 |
|
51,047 |
| ||
Construction-in-progress |
|
|
|
194,874 |
|
234,442 |
| ||
Total fixed assets |
|
|
|
$ |
1,366,478 |
|
$ |
1,211,593 |
|
Accumulated depreciation and amortization |
|
|
|
(393,232 |
) |
(267,297 |
) | ||
|
|
|
|
$ |
973,246 |
|
$ |
944,296 |
|
Assets acquired under capital leases, net of accumulated amortization, were $43.5 million and $47.0 million at June 29, 2013 and September 29, 2012, respectively.
Total depreciation and amortization expense relating to all fixed assets was $49.9 million and $33.4 million for the thirteen weeks ended June 29, 2013 and June 23, 2012, respectively. Total depreciation and amortization expense relating to all fixed assets was $137.7 million and $89.2 million for the thirty-nine weeks ended June 29, 2013 and June 23, 2012, respectively.
7. Goodwill and Intangible Assets
The following represented the change in the carrying amount of goodwill by segment for the thirty-nine weeks ended June 29, 2013 (in thousands):
|
|
Domestic |
|
Canada |
|
Total |
| |||
Balance at September 29, 2012 |
|
$ |
369,353 |
|
$ |
438,723 |
|
$ |
808,076 |
|
Foreign currency effect |
|
|
|
(28,437 |
) |
(28,437 |
) | |||
Balance at June 29, 2013 |
|
$ |
369,353 |
|
$ |
410,286 |
|
$ |
779,639 |
|
Effective May 8, 2013, the Company combined the results of its U.S. operations, formerly reported in the SCBU and KBU segments, into one Domestic segment.
Indefinite-lived intangible assets included in the Canada operating segment consisted of the following (in thousands) as of:
|
|
June 29, 2013 |
|
September 29, 2012 |
| ||
Trade names |
|
$ |
95,745 |
|
$ |
102,381 |
|
Intangible Assets Subject to Amortization
Definite-lived intangible assets consisted of the following (in thousands) as of:
|
|
|
|
June 29, 2013 |
|
September 29, 2012 |
| ||||||||
|
|
Useful Life in |
|
Gross Carrying |
|
Accumulated |
|
Gross Carrying |
|
Accumulated |
| ||||
Acquired technology |
|
4-10 |
|
$ |
21,603 |
|
$ |
(16,696 |
) |
$ |
21,622 |
|
$ |
(15,433 |
) |
Customer and roaster agreements |
|
8-11 |
|
26,829 |
|
(18,944 |
) |
27,323 |
|
(16,796 |
) | ||||
Customer relationships |
|
2-16 |
|
408,366 |
|
(102,429 |
) |
430,178 |
|
(79,168 |
) | ||||
Trade names |
|
9-11 |
|
36,856 |
|
(12,310 |
) |
38,000 |
|
(9,785 |
) | ||||
Non-compete agreements |
|
2-5 |
|
374 |
|
(359 |
) |
374 |
|
(344 |
) | ||||
Total |
|
|
|
$ |
494,028 |
|
$ |
(150,738 |
) |
$ |
517,497 |
|
$ |
(121,526 |
) |
Definite-lived intangible assets are amortized on a straight-line basis over the period of expected economic benefit. Total amortization expense was $11.3 million and $11.5 million for the thirteen weeks ended June 29, 2013 and June 23, 2012, respectively. Total amortization expense was $34.2 million and $34.5 million for the thirty-nine weeks ended June 29, 2013 and June 23, 2012, respectively.
The estimated aggregate amortization expense for the remainder of fiscal 2013, for each of the next five years and thereafter, is as follows (in thousands):
Remainder of 2013 |
|
$ |
11,083 |
|
2014 |
|
43,731 |
| |
2015 |
|
42,182 |
| |
2016 |
|
41,476 |
| |
2017 |
|
40,080 |
| |
2018 |
|
40,080 |
| |
Thereafter |
|
124,658 |
|
8. Product Warranties
The Company offers a one-year warranty on all Keurig® Single Cup 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. At this time, management believes that the warranty rates used and related reserves are appropriate.
The changes in the carrying amount of product warranties for the thirteen and thirty-nine weeks ended June 29, 2013 and June 23, 2012 are as follows (in thousands):
|
|
Thirteen weeks ended |
|
Thirty-nine weeks ended |
| ||||||||
|
|
June 29, 2013 |
|
June 23, 2012 |
|
June 29, 2013 |
|
June 23, 2012 |
| ||||
Balance, beginning of period |
|
$ |
14,456 |
|
$ |
25,740 |
|
$ |
20,218 |
|
$ |
14,728 |
|
Provision charged to income |
|
(606 |
) |
2,605 |
|
6,580 |
|
38,425 |
| ||||
Usage |
|
(3,652 |
) |
(8,962 |
) |
(16,600 |
) |
(33,770 |
) | ||||
Balance, end of period |
|
$ |
10,198 |
|
$ |
19,383 |
|
$ |
10,198 |
|
$ |
19,383 |
|
There were no recoveries for the thirteen weeks ended June 29, 2013. For the thirteen weeks ended June 23, 2012, the Company recorded recoveries of $0.2 million. For the thirty-nine weeks ended June 29, 2013 and June 23, 2012, the Company recorded recoveries of $0.6 million and $8.3 million, respectively.
The recoveries are under an agreement with a supplier and are recorded as a reduction of warranty expense. The recoveries are not reflected in the provision charged to income in the table above.
9. 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 long-term 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 29, 2013 are as follows (in thousands):
|
|
Liability attributable to |
|
Equity attributable |
| ||
Balance at September 29, 2012 |
|
$ |
4,928 |
|
$ |
9,904 |
|
Net income |
|
361 |
|
325 |
| ||
Adjustment to redemption value |
|
407 |
|
1,312 |
| ||
Cash distributions |
|
(388 |
) |
(618 |
) | ||
Other comprehensive loss |
|
(349 |
) |
(685 |
) | ||
Balance at June 29, 2013 |
|
$ |
4,959 |
|
$ |
10,238 |
|
10. Derivative Financial Instruments
Cash Flow Hedges
The Company is exposed to certain risks relating to ongoing business operations. The primary risks that are mitigated by financial instruments are interest rate risk and commodity price risk. The Company uses interest rate swaps to mitigate interest rate risk associated with the Companys variable-rate borrowings and enters into coffee futures contracts to hedge future coffee purchase commitments of green coffee with the objective of minimizing cost risk due to market fluctuations.
The Company designates these contracts as cash flow hedges and measures the effectiveness of these derivative instruments at each balance sheet date. The changes in the fair value of these instruments are classified in accumulated other comprehensive income (loss). The gain or loss on these instruments is reclassified from other comprehensive income (OCI) into earnings in the same period or periods during which the hedged transaction affects earnings. If it is determined that a derivative is not highly effective, the gain or loss is reclassified into earnings.
Fair Value Hedges
The Company enters into foreign currency forward contracts to hedge certain recognized liabilities in currencies other than the Companys 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 29, 2013, the Company has approximately three years remaining on a CDN $120.0 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 29, 2013 was $0.4 million and $1.3 million, respectively. Additional interest expense pursuant to the cross currency swap agreement for the thirteen and thirty-nine weeks ended June 23, 2012 was $0.4 million and $1.4 million, respectively.
The Company occasionally enters into foreign currency forward contracts and coffee futures contracts which are not designated as hedging instruments for accounting purposes, in addition to the foreign currency forward contracts and coffee futures contracts noted above. Contracts that are not designated as hedging instruments are recorded at fair value with the changes in fair value recognized in the 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.
The following table summarizes the fair value of the Companys derivatives included on the Unaudited Consolidated Balance Sheets (in thousands):
|
|
June 29, 2013 |
|
September 29, 2012 |
|
Balance Sheet Classification |
| ||
Derivatives designated as hedges: |
|
|
|
|
|
|
| ||
Cash Flow Hedges: |
|
|
|
|
|
|
| ||
Interest rate swaps |
|
$ |
(6,329 |
) |
$ |
(9,019 |
) |
Other current liabilities |
|
Coffee futures |
|
(853 |
) |
(342 |
) |
Other current liabilities |
| ||
|
|
$ |
(7,182 |
) |
$ |
(9,361 |
) |
|
|
|
|
|
|
|
|
|
| ||
Derivatives not designated as hedges: |
|
|
|
|
|
|
| ||
Cross currency swap |
|
$ |
1,752 |
|
$ |
(7,242 |
) |
Other current assets (other current liabilities) |
|
|
|
$ |
1,752 |
|
$ |
(7,242 |
) |
|
|
|
|
|
|
|
|
|
| ||
Total |
|
$ |
(5,430 |
) |
$ |
(16,603 |
) |
|
|
The following table summarizes the amount of 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 29, 2013 |
|
June 23, 2012 |
|
June 29, 2013 |
|
June 23, 2012 |
| ||||
Cash Flow Hedges: |
|
|
|
|
|
|
|
|
| ||||
Interest rate swaps |
|
$ |
1,020 |
|
$ |
(366 |
) |
$ |
2,690 |
|
$ |
1,120 |
|
Coffee futures |
|
(2,714 |
) |
(538 |
) |
(3,662 |
) |
(2,754 |
) | ||||
Total |
|
$ |
(1,694 |
) |
$ |
(904 |
) |
$ |
(972 |
) |
$ |
(1,634 |
) |
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 |
|
|
| ||||||||
|
|
June 29, |
|
June 23, |
|
June 29, |
|
June 23, |
|
Location of Losses Reclassified |
| ||||
Coffee futures |
|
$ |
(394 |
) |
$ |
440 |
|
$ |
(1,122 |
) |
$ |
106 |
|
Cost of sales |
|
Total |
|
$ |
(394 |
) |
$ |
440 |
|
$ |
(1,122 |
) |
$ |
106 |
|
|
|
The Company expects to reclassify $1.9 million of net losses, net of tax, from OCI to earnings for coffee derivatives within the next twelve months.
The amount of gain (loss), gross of tax, on fair value hedges and related hedged items for the thirteen weeks ended June 29, 2013 and June 23, 2012 is as follows (in thousands):
|
|
Thirteen weeks ended |
|
|
| ||||||||||
|
|
June 29, 2013 |
|
June 23, 2012 |
|
|
| ||||||||
|
|
Gain (loss) on |
|
Gain (loss) on |
|
Gain (loss) on |
|
Gain (loss) on |
|
Location of Gain (Loss) Recognized |
| ||||
Foreign currency forwards contracts |
|
$ |
|
|
$ |
|
|
$ |
(19 |
) |
$ |
19 |
|
(Loss) gain on foreign currency, net |
|
The amount of gain (loss), gross of tax, on fair value hedges and related hedged items for the thirty-nine weeks ended June 29, 2013 and June 23, 2012 is as follows (in thousands):
|
|
Thirty-nine weeks ended |
|
|
| ||||||||||
|
|
June 29, 2013 |
|
June 23, 2012 |
|
|
| ||||||||
|
|
Gain (loss) on |
|
Gain (loss) on |
|
Gain (loss) on |
|
Gain (loss) on |
|
Location of Gain (Loss) Recognized |
| ||||
Foreign currency forwards contracts |
|
$ |
(10 |
) |
$ |
10 |
|
$ |
(48 |
) |
$ |
48 |
|
(Loss) gain on foreign currency, net |
|
Net gains (losses) on financial instruments not designated as hedges for accounting purposes recorded in gain (loss) on financial instruments, net, is as follows (in thousands):
|
|
Thirteen weeks ended |
|
Thirty-nine weeks ended |
| ||||||||
|
|
June 29, 2013 |
|
June 23, 2012 |
|
June 29, 2013 |
|
June 23, 2012 |
| ||||
Net gain (loss) on cross currency swap |
|
$ |
4,419 |
|
$ |
3,181 |
|
$ |
8,994 |
|
$ |
(32 |
) |
Net loss on coffee futures |
|
|
|
(148 |
) |
|
|
(148 |
) | ||||
Net loss on interest rate cap |
|
|
|
(1 |
) |
|
|
(34 |
) | ||||
Total |
|
$ |
4,419 |
|
$ |
3,032 |
|
$ |
8,994 |
|
$ |
(214 |
) |
11. 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 Financial Accounting Standards Board 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 identical or 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 29, 2013 for the Companys financial assets (liabilities) (in thousands):
|
|
Fair Value Measurements Using |
| |||||||
|
|
Level 1 |
|
Level 2 |
|
Level 3 |
| |||
Derivatives: |
|
|
|
|
|
|
| |||
Interest rate swaps |
|
$ |
|
|
$ |
(6,329 |
) |
$ |
|
|
Cross currency swap |
|
|
|
1,752 |
|
|
| |||
Coffee futures |
|
|
|
(853 |
) |
|
| |||
Total |
|
$ |
|
|
$ |
(5,430 |
) |
$ |
|
|
The following table summarizes the fair values and the levels used in fair value measurements as of September 29, 2012 for the Companys financial assets (liabilities) (in thousands):
|
|
Fair Value Measurements Using |
| |||||||
|
|
Level 1 |
|
Level 2 |
|
Level 3 |
| |||
Derivatives: |
|
|
|
|
|
|
| |||
Interest rate swaps |
|
$ |
|
|
$ |
(9,019 |
) |
$ |
|
|
Cross currency swap |
|
|
|
(7,242 |
) |
|
| |||
Coffee futures |
|
|
|
(342 |
) |
|
| |||
Total |
|
$ |
|
|
$ |
(16,603 |
) |
$ |
|
|
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 Companys fair value measurements include a credit valuation adjustment for the significant concentrations of credit risk.
As of June 29, 2013, 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 $238.1 million and $473.7 million as of June 29, 2013 and September 29, 2012, 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 Companys 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.
12. Income Taxes
The Company recognizes deferred tax assets and liabilities for the expected future tax benefits or consequences of temporary differences between the financial statement carrying amounts of existing assets and liabilities, and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled.
As of June 29, 2013, the Company had a $17.7 million state capital loss carryforward and an $11.5 million state net operating loss carryforward 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 29, 2013 and September 29, 2012 was $22.1 million and $24.0 million, respectively. The amount of unrecognized tax benefits at June 29, 2013 that would impact the effective tax rate if resolved in favor of the Company is $18.5 million. As a result of prior acquisitions, the Company is indemnified for $14.1 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 29, 2013 and September 29, 2012, accrued interest and penalties of $1.8 million and $0.6 million, respectively, were included in the Unaudited Consolidated Balance Sheets. The Company recognizes interest and penalties in income tax expense. The Company released $2.2 million of unrecognized tax benefits in the second quarter of fiscal 2013 and expects to release an additional $1.5 million during the remainder of fiscal 2013 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. The Company is currently being examined by the Internal Revenue Service for its fiscal year ended September 25, 2010. With some exceptions, the Company is generally no longer subject to examinations with respect to returns filed for fiscal years prior to 2006.
13. Stockholders Equity
Stock Repurchase Program
On July 30, 2012, the Board of Directors authorized a program for the Company to repurchase up to $500.0 million of the Companys common shares over two years, at such times and prices as determined by the Companys management. Consistent with Delaware law, any repurchased shares are constructively retired and returned to an unissued status. Accordingly, the par value of repurchased shares is deducted from common stock and excess repurchase price over the par value is deducted from additional paid-in capital and from retained earnings if additional paid-in capital is depleted.
The following table summarizes the shares acquired under the program:
|
|
Thirty-nine weeks ended |
|
|
|
|
| |||
|
|
June 29, 2013 |
|
Fiscal 2012 |
|
Total |
| |||
Number of shares acquired |
|
4,864,593 |
|
3,120,700 |
|
7,985,293 |
| |||
Average price per share of acquired shares |
|
$ |
25.84 |
|
$ |
24.50 |
|
$ |
25.32 |
|
Total cost of acquired shares (in thousands) |
|
$ |
125,681 |
|
$ |
76,470 |
|
$ |
202,151 |
|
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 29, 2013:
|
|
Cash Flow Hedges |
|
Translation |
|
Accumulated Other |
| |||
Balance at September 29, 2012 |
|
$ |
(5,792 |
) |
$ |
15,992 |
|
$ |
10,200 |
|
Current period other comprehensive income (loss) |
|
90 |
|
(41,010 |
) |
(40,920 |
) | |||
Balance at June 29, 2013 |
|
$ |
(5,702 |
) |
$ |
(25,018 |
) |
$ |
(30,720 |
) |
The unfavorable translation adjustment change during the thirty-nine weeks ended June 29, 2013 was primarily due to the weakening of the Canadian dollar against the U.S. dollar. See also Note 10, Derivative Financial Instruments.
14. 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 29, 2013 and June 23, 2012:
|
|
Thirty-nine weeks ended |
| ||||
|
|
June 29, |
|
June 23, |
| ||
Average expected life |
|
6 years |
|
6 years |
| ||
Average volatility |
|
81 |
% |
68 |
% | ||
Dividend yield |
|
|
|
|
| ||
Risk-free interest rate |
|
1.02 |
% |
1.37 |
% | ||
Weighted average fair value |
|
$ |
31.17 |
|
$ |
32.02 |
|
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 Companys common stock. RSUs and PSUs are awards denominated in units that are settled in shares of the Companys 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 Grantees continuing employment. The vesting of PSUs is conditioned on the achievement of both a Grantees service and the Companys performance requirements. The fair value of RSUs, RSAs and PSUs is based on the closing price of the Companys common stock on the grant date. Compensation expense for RSUs and RSAs is recognized ratably over a Grantees service period. Compensation expense for PSUs is also recognized over a Grantees 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. In addition, the Company awards deferred cash awards (DCAs), to Grantees which entitle a Grantee to receive cash paid over time upon vesting. The vesting of DCAs is conditioned on the achievement of a Grantees continued employment. All awards are reserved for issuance under the Companys 2006 Incentive Plan and vest over periods determined by the Board of Directors, generally in the range of three to four years for RSUs, RSAs and DCAs, and three years for PSUs.
Employee Stock Purchase Plan
The grant-date fair value of employees purchase rights under the Companys 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 29, 2013 and June 23, 2012:
|
|
Thirty-nine weeks ended |
| ||||
|
|
June 29, |
|
June 23, |
| ||
Average expected life |
|
6 months |
|
6 months |
| ||
Average volatility |
|
86 |
% |
61 |
% | ||
Dividend yield |
|
|
|
|
| ||
Risk-free interest rate |
|
0.13 |
% |
0.09 |
% | ||
Weighted average fair value |
|
$ |
14.38 |
|
$ |
10.46 |
|
Income before income taxes in the Unaudited Consolidated Statements of Operations includes compensation expense related to the plans described above of $6.1 million and $4.4 million for the thirteen weeks ended June 29, 2013 and June 23, 2012, respectively; and $21.2 million and $13.6 million for the thirty-nine weeks ended June 29, 2013 and June 23, 2012, respectively.
Deferred Compensation Plan
The Company also maintains a Deferred Compensation Plan (Plan) which allows participants to defer compensation until a future date. Only directors and certain highly compensated employees of the Company selected by the Companys Board of Directors are eligible to participate in the Plan. Compensation expense recorded under the Plan was $0.05 million and $0.1 million for the thirteen weeks ended June 29, 2013 and June 23, 2012, respectively; and $0.2 million for each of the thirty-nine weeks ended June 29, 2013 and June 23, 2012.
15. Legal Proceedings
On October 1, 2010, Keurig, Incorporated, a wholly-owned subsidiary of the Company (Keurig), filed suit against Sturm Foods, Inc. (Sturm) in the United States District Court for the District of Delaware (Civil Action No. 1:10-CV-00841-SLR) for patent and trademark infringement, false advertising, and other claims, related to Sturms sale of Grove Square beverage cartridges that claim to be compatible with Keurig® brewers. On September 13, 2012, the District Court rendered a summary judgment decision in favor of Sturm on the patent side of the suit. Keurig has since appealed to the United States Federal Circuit Court of Appeals the District Courts summary judgment decision, and oral argument for that appeal is scheduled to take place before the Federal Circuit on August 6, 2013. Separately, on February 19, 2013, Keurig and Sturm entered into a settlement agreement with respect to the trademark infringement, false advertising, and other claims at issue in the suit, all of which have now been dismissed. The settlement agreement did not materially impact our consolidated financial results of operations.
On November 2, 2011, Keurig filed suit against JBR, INC., d/b/a Rogers Family Company (Rogers) in the United States District Court for the District of Massachusetts (Civil Action No. 1:11-cv-11941-MBB) for patent infringement related to Rogers sale of San Francisco Bay beverage cartridges for use with Keurig® brewers. The suit alleges that the San Francisco Bay cartridges violate Keurig patents (U.S. Patent Nos. D502,362, 7,165,488 and 7,347,138). Keurig sought an injunction prohibiting Rogers from selling these cartridges, as well as money damages. In late 2012, Rogers moved from summary judgment of no infringement as to all three asserted patents. On May 24, 2013, the District of Massachusetts granted Rogers' summary judgment motions. Keurig has since appealed the Court's ruling to the Federal Circuit, and that appeal is currently pending.
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-c v-00189-WJM-KMT) for patent infringement related to the making, using, importing, selling and/or offering for sale of K-Cup® packs containing tea. The suit alleges that the Company, Keurig and Starbucks are violating 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 its Manufacturing, Sales and Distribution Agreement with Starbucks, the Company is defending and indemnifying Starbucks in connection with the suit. On March 13, 2012, the Company and Keurig, for themselves and Starbucks, filed an answer with the court, generally denying all of Teashots allegations. The Company and Keurig, for themselves and Starbucks, are vigorously defending this lawsuit. 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. No hearing on the summary judgment motions has 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 SECs Division of Enforcement continues to conduct an inquiry into matters at the Company. The Company is cooperating fully with the SEC staffs inquiry.
Stockholder Litigation
Three putative securities fraud class actions have been filed against the Company and certain of its officers and directors, along with two putative stockholder derivative actions. The first consolidated putative securities fraud class action was commenced following the Companys disclosure of the SEC inquiry on September 28, 2010. The second putative securities fraud class action was filed on November 29, 2011, and the third putative securities fraud class action was filed on May 7, 2012. A consolidated putative stockholder derivative action pending in the United States District Court for the District of Vermont consists of five separate putative stockholder derivative complaints, the first two were filed after the Companys 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. In addition, a putative stockholder derivative action is pending in the Superior Court of the State of Vermont for Washington County that was commenced following the Companys disclosure of the SEC inquiry on September 28, 2010.
The first consolidated putative securities fraud class action, organized under the caption Horowitz v. Green Mountain Coffee Roasters, Inc., Civ. No. 2:10-cv-00227, is pending in the United States District Court for the District of Vermont before the Honorable William K. Sessions, III. The underlying complaints in the consolidated action allege violations of the federal securities laws in connection with the Companys disclosures relating to its revenues and its forward guidance. The complaints include counts for violation of Section 10(b) of the Exchange Act and Rule 10b-5 against all defendants, and for violation of Section 20(a) of the Exchange Act against the officer defendants. The plaintiffs seek to represent all purchasers of the Companys securities between July 28, 2010 and September 28, 2010 or September 29, 2010. The complaints seek class certification, compensatory damages, equitable and/or injunctive relief, attorneys fees, costs, and such other relief as the court should deem just and proper. Pursuant to the Private Securities Litigation Reform Act of 1995, 15 U.S.C. § 78u-4(a)(3), plaintiffs had until November 29, 2010 to move the court to serve as lead plaintiff of the putative class. On December 20, 2010, the court appointed Jerzy Warchol, Robert M. Nichols, Jennifer M. Nichols, Marc Schmerler and Mike Shanley lead plaintiffs and approved their selection of Glancy Binkow & Goldberg LLP and Robbins Geller Rudman & Dowd LLP as co-lead counsel and the Law Office of Brian Hehir and Woodward & Kelley, PLLC as liaison counsel. On December 29, 2010 and January 3, 2011, two of the plaintiffs in the underlying actions in the consolidated proceedings, Russell Blank and Dan M. Horowitz, voluntarily dismissed their cases without prejudice. Pursuant to a stipulated motion granted by the court on November 29, 2010, the lead plaintiffs filed a consolidated complaint on February 23, 2011, and defendants moved to dismiss that complaint on April 25, 2011. The court heard argument on the motions to dismiss on January 5, 2012. On January 27, 2012, the court issued an order granting defendants motions and dismissing the consolidated complaint without prejudice and the lead plaintiffs filed a motion for leave to amend the complaint on March 27, 2012. On April 9, 2012, the parties filed a stipulated motion for filing of the amended complaint and to set a briefing schedule for defendants motions to dismiss. Briefing on defendants motions to dismiss was completed on August 29, 2012. On March 20, 2013, the court granted defendants motions to dismiss the amended complaint and dismissed the amended complaint with prejudice. On April 19, 2013, the plaintiffs filed a notice appealing the courts ruling to the United States Court of Appeals for the Second Circuit. On July 24, 2013, plaintiff-appellants filed a motion to voluntarily dismiss the appeal with prejudice, and which the appeals court granted on July 29, 2013.
The second 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 on November 29, 2011 and is also pending in the United States District Court for the District of Vermont before the Honorable William K. Sessions, III. Plaintiffs amended complaint alleges violations of the federal securities laws in connection with the Companys disclosures relating to its revenues and its inventory accounting practices. The amended complaint seeks class certification, compensatory damages, attorneys fees, costs, and such other relief as the court should deem just and proper. Plaintiffs seek to represent all purchasers of the Companys 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 Companys 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 Retirements System, Employees Retirements 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 does not allege any claims under the Securities Act against the Company, its officers and directors, or the Companys underwriters in connection with the May 2011 secondary common stock offering. Defendants moved to dismiss the amended complaint on March 1, 2013 and the briefing of their motions was completed on June 26, 2013. An oral argument on the defendant's motions to dismiss is set for August 27, 2013. 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 third consolidated putative securities fraud class action, captioned Fifield v. Green Mountain Coffee Roasters, Inc., Civ. No. 2:12-cv-00091, is pending in the United States District Court for the District of Vermont before the Honorable William K. Sessions, III. Plaintiffs amended complaint alleges violations of the federal securities laws in connection with the Companys disclosures relating to its forward guidance. The amended complaint includes counts for violation of Section 10(b) of the Exchange Act and Rule 10b-5 against all defendants, and for violation of Section 20(a) of the Exchange Act against the officer defendants. The amended complaint seeks 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 seek to represent all purchasers of the Companys 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.
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 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 as Henry Cargo v. Robert P. Stiller, et al., Civ. No. 2:12-cv-00161, and granting plaintiffs leave to lift the stay for the limited purpose of filing a consolidated complaint. The consolidated complaint is asserted nominally on behalf of the Company against certain of its officers and directors. The consolidated complaint asserts claims for breach of fiduciary duty, waste of corporate assets, unjust enrichment, contribution, and indemnification and seeks compensatory damages, injunctive relief, restitution, disgorgement, attorneys 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, 2012, the parties filed a further joint stipulation continuing the temporary stay until the court either denies a motion to dismiss the LAMPERS punitive fraud class action or the LAMPERS punitive fraud class action is dismissed with prejudice.
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 courts 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. Defendants are due to move to dismiss or otherwise respond to the complaint on August 23, 2013.
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.
16. Related Party Transactions
The Company, from time to time, used travel services provided by Heritage Flight, a charter air services company owned by Robert P. Stiller, who previously served on the Companys Board of Directors and who is a security holder of more than 5% of the Company's Common Stock. The Company did not incur any expenses for Heritage Flight travel services for the thirteen weeks ended June 29, 2013, and incurred $0.2 million during the thirteen weeks ended June 23, 2012. During the thirty-nine weeks ended June 29, 2013 and June 23, 2012, the Company incurred expenses of $0.2 million and $0.6 million, respectively.
Effective January 1, 2013, the Company entered into a license agreement with Creamer Nation, LLC, an affiliate of Dean Foods (the Creamer Agreement). The Creamer Agreement provides Creamer Nation, LLC with a four-year exclusive license to use the Green Mountain Coffee® brand in connection with refrigerated and shelf stable multi serve and single serve iced coffees and iced lattes and dairy and non-dairy creamers for sale in grocery, convenience, mass merchandise, and club channels. The Creamer Agreement grants a similar license for the Tullys® brand on a non-exclusive basis for a three-year term. The Company will receive royalty income from Creamer Nation, LLC on sales of the licensed products; however has not yet recognized any royalty income related the Creamer Agreement during the thirty-nine weeks ended June 29, 2013. Barbara Carlini, an employee of Dean Foods, serves on the Companys Board of Directors.
The Company hired Mr. Christian R. Stiller as a Marketing Manager, Southern California, effective June 24, 2013, with a base annual salary of $95,000, target bonus of 10% of his base annual salary and the Companys retirement and health and welfare benefits. His employment is at will. Christian R. Stiller is the son of Robert P. Stiller, who is a security holder of more than 5% of the Companys Common Stock.
17. Earnings Per Share
The following table illustrates the reconciliation of the numerator and denominator of basic and diluted earnings per share computations (dollars in thousands, except per share data):
|
|
Thirteen weeks ended |
|
Thirty-nine weeks ended |
| ||||||||
|
|
June 29, |
|
June 23, |
|
June 29, |
|
June 23, |
| ||||
Numerator for basic and diluted earnings per share: |
|
|
|
|
|
|
|
|
| ||||
Net income attributable to GMCR |
|
$ |
116,272 |
|
$ |
73,296 |
|
$ |
356,276 |
|
$ |
270,741 |
|
Denominator: |
|
|
|
|
|
|
|
|
| ||||
Basic weighted average shares outstanding |
|
149,825,581 |
|
155,459,690 |
|
149,307,144 |
|
155,071,117 |
| ||||
Effect of dilutive securities |
|
3,043,811 |
|
3,839,888 |
|
3,340,623 |
|
4,293,323 |
| ||||
Diluted weighted average shares outstanding |
|
152,869,392 |
|
159,299,578 |
|
152,647,767 |
|
159,364,440 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Basic net income per common share |
|
$ |
0.78 |
|
$ |
0.47 |
|
$ |
2.39 |
|
$ |
1.75 |
|
Diluted net income per common share |
|
$ |
0.76 |
|
$ |
0.46 |
|
$ |
2.33 |
|
$ |
1.70 |
|
For the thirteen weeks ended June 29, 2013 and June 23, 2012, shares related to equity-based compensation of 607,000 and 1,198,000, respectively, were excluded from the calculation of diluted earnings per share because they were antidilutive.
For the thirty-nine weeks ended June 29, 2013 and June 23, 2012, shares related to equity-based compensation of 954,000 and 557,000, respectively, were excluded from the calculation of diluted earnings per share because they were antidilutive.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis is intended to help you understand the results of operations and financial condition of Green Mountain Coffee Roasters, Inc. (together with its subsidiaries, the Company, GMCR, we, our, or us). You should read the following discussion and analysis in conjunction with our unaudited consolidated financial statements and related notes included elsewhere in this report.
Overview
We are a leader in the specialty coffee and coffeemaker businesses. We sell Keurig® Single Cup Brewers and roast high-quality Arabica bean coffees including single-origin, Fair Trade Certified, certified organic, flavored, limited edition and proprietary blends offered in K-Cup® and Vue® packs (single serve packs) for use with our Keurig® Single Cup Brewers. We also offer traditional whole bean and ground coffee in other package types including bags, fractional packages and cans. In addition, we produce and sell other specialty beverages in single serve packs including hot and iced teas, iced coffees, hot and iced fruit brews, hot cocoa and other dairy-based beverages. The brands include:
Arbuckle® |
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Emerils® |
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Red Carpet |
Barista Prima Coffeehouse® |
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Folgers Gourmet Selections® |
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revv® |
Bigelow® |
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Gloria Jeans® |
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Seattles Best Coffee® |
Brûlerie Mont-Royal® |
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Green Mountain Coffee® |
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Snapple® |
Brûlerie St. Denis® |
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Green Mountain Naturals® |
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Starbucks® |
Café Adagio Coffee® |
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Kahlua® |
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Swiss Miss® |
Café Escapes® |
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Kirkland Signature |
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Tazo® |
Caribou Coffee® |
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Lavazza® |
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The Original Donut Shop |
Celestial Seasonings® |
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Lipton® |
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Timothys® |
Coffee People® |
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Market Basket® |
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TK |
Diedrich Coffee® |
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McQuarry |
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Tullys® |
Distinction® |
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Millstone® |
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Twinings of London® |
Donut House Collection® |
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Newmans Own® Organics |
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Van Houtte® |
Dunkin Donuts |
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Orient Express® |
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Vitamin Burst® |
Eight OClock® |
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Promenade |
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Wolfgang Puck® |
The Bigelow®, Caribou Coffee®, Celestial Seasonings®, Dunkin Donuts, Eight OClock®, Emerils®, Folgers Gourmet Selections®, Gloria Jeans®, Kahlua®, Kirkland Signature, Lavazza®, Lipton®, Market Basket®, Millstone®, Newmans Own® Organics, Seattles Best Coffee®, Snapple®, Starbucks®, Swiss Miss®, Tazo®, Twinings of London®, and Wolfgang Puck® brands are available through relationships we have with their respective brand owners. Each of these brands is property of their respective owners and is used with permission.
Over the last several years the primary growth in the coffee industry has come from the specialty coffee category, including demand for single cup specialty coffee which can now be enjoyed in a wide variety of locations, including home, office, professional locations, restaurants, hospitality and specialty coffee shops. This growth has been driven by the emergence of specialty coffee shops throughout North America, the general level of consumer knowledge of, and appreciation for, coffee quality and variety, and the wider availability of high-quality coffee. We have been benefiting from this overall industry trend in addition to what we believe to be our carefully developed and distinctive advantages over our competitors.
Our growth strategy involves developing and managing marketing programs to drive Keurig® Single Cup Brewer adoption in North American households and offices in order to generate ongoing demand for single serve packs and, in the long-term, globally. As part of this strategy, we work to sell our at-home (AH) brewers at attractive price points which are approximately at cost, or sometimes at a loss when factoring in the incremental costs related to sales, in order to drive the sales of profitable single serve packs. In addition, we have license agreements with Breville PTY Limited (producer of Breville® brand coffeemakers), Jarden Consumer Solutions (producer of Mr. Coffee® brand coffeemakers), and Conair Corporation (producer of Cuisinart® brand coffeemakers), under which each produce, market and sell coffeemakers co-branded with Keurig®.
In recent years, our growth has been driven predominantly by the growth and adoption of Keurig® Single Cup Brewing systems which includes both the K-Cup® and the Vue® brewers and related single serve packs. In the third fiscal quarter of 2013, approximately 91% of our consolidated net sales were attributed to the combination of single serve packs and Keurig® Single Cup Brewers and related accessories.
We regularly conduct consumer surveys to better understand our consumers preferences and behaviors. In Company surveys, we have learned that consumers prefer our Keurig® Single Cup Brewing systems for three main reasons (which we see as our competitive advantages):
1 Qualityexpectations of the quality of coffee consumers drink has increased over the last several years and, we believe, with the Keurig® system, consumers can be certain they will get a high-quality, consistently produced beverage every time.
2 Conveniencethe Keurig® system prepares beverages generally in less than a minute at the touch of a button with no mess, no fuss.
3 Choicewith many single serve beverage brands across multiple beverage categories, GMCR offers more than 225 individual varieties, allowing consumers to enjoy and explore a wide range of beverages. In addition to a variety of brands of coffee and tea, we also produce and sell iced teas, iced coffees, hot and iced fruit brews, hot cocoa and other dairy-based beverages, in single serve packs.
We believe its the combination of these attributes that make the Keurig® Single Cup Brewing systems so appealing to so many consumers.
We are focused on building our brands and profitably growing our business. We believe we can continue to grow sales by increasing consumer awareness in existing regions, expanding into new geographic regions, expanding consumer choice of coffee, tea and other beverages in our existing brewing systems or through the introduction of new brewing platforms, expanding sales in adjacent beverage industry segments and/or selectively pursuing other synergistic opportunities.
We have continued to expand consumer choice in the system by entering into a number of business relationships which enable us to offer other strong national and regional coffee and tea brands such as Folgers®, Millstone®, Dunkin Donuts, Seattles Best Coffee®, Starbucks® coffee, The Coffee Bean & Tea Leaf® coffee, Cinnabon® bakery-inspired coffee, Tazo® tea, Eight OClock® coffee, Tetley® tea, Good Earth® tea, Lipton® and Snapple® teas in single serve packs for use with Keurig® Single Cup Brewers. We also continue to examine opportunities for business relationships with other strong national/regional brands including the potential for adding premium store-brand or co-branded single serve packs to create additional single serve products that will help augment consumer demand for the Keurig® Single Cup Brewing systems. For example, in May 2013, we announced we are partnering with International Coffee and Tea, LLC to make The Coffee Bean & Tea Leaf® brand available in K-Cup® packs for the Keurig® Single Cup Brewing system. We believe these new product offerings fuel excitement for current Keurig® owners and users; raise system awareness; attract new consumers to the system; and promote expanded use of the system. These relationships were established with careful consideration of potential economics and with the expectation that these relationships will lead to increased Keurig® Single Cup Brewing system awareness and household adoption through the participating brands advertising and merchandising activities.
Our business relationships with participating brands are generally established through licensing or manufacturing arrangements.
Under licensing arrangements, we license the right to manufacture, distribute and sell the finished products through our distribution channels using the brand owners marks. For the right to use a brand owners mark, we pay a royalty to the brand owner based on our sales of finished products that contain the brand owners mark.
Under manufacturing arrangements, we manufacture finished beverage products using raw materials sourced by us or provided by the brand owner. In both instances, once the manufacturing process is complete, we sell the finished product either to the brand owner or to our customers. Under certain manufacturing arrangements, our sole customer is the brand owner and we are prohibited from selling the beverage products to other types of customers through our distribution channels. Under other manufacturing arrangements, in addition to manufacturing the beverage for sale to the brand owner, we have the right to sell the beverages using the brand owners marks in certain of our channels through a licensing arrangement, as described above.
No individual licensing or manufacturing arrangement (including arrangements covering multiple brands) has generated net sales that have been significant to our consolidated net sales (i.e., no arrangement has accounted for more than 10% of our consolidated net sales in any period). We analyze the impact of each arrangement on consolidated net sales on an individual basis. We have determined that it is unlikely that we would lose our licensing or manufacturing rights to multiple brands at the same time. Each of our licensing and manufacturing arrangements are separately negotiated with unrelated parties, and each has distinct terms and conditions, including the duration of agreement and termination rights. Further, based upon the number of business relationships as well as the depth of our owned-brands, it is our belief that no individual business relationship is critical to the execution of our growth strategy.
We are also focused on continued innovation with our owned-brands, both in single serve brewing systems and other single serve beverages. Some of our recent initiatives include:
· Expanding the Keurig® brewing platforms with introduction of a new commercial grade Keurig® Bolt Carafe Brewing System which, following in-office testing, will be available throughout the U.S. and Canada through limited Keurig Authorized Distributors beginning in late fall of calendar 2013;
· An expansion of our Keurig® Single Cup Brewing system to include Keurig® Vue® brewers and related Vue® packs; and
· A launch of the Keurig® Rivo Cappuccino and Latte System and Rivo pack espresso blend varieties (collectively the Rivo System), in partnership with Luigi Lavazza S.p.A. (Lavazza).
Management is focused on executing our growth strategy to drive Keurig® Single Cup Brewer adoption in North American households and offices in order to generate ongoing demand for single serve packs.
We compete not only with other widely advertised branded products, but also with private label or generic products that generally are sold at lower prices. In September 2012, two patents associated with our K-Cup® packs expired, and certain third parties have launched competing products. Currently, we anticipate that the total of all unlicensed portion packs will represent roughly 5% to 15% of the system demand, starting at the lower end of the range in 2013.
For the third fiscal quarter of 2013, our net sales of $967.1 million represented growth of 11% over the third fiscal quarter of 2012 (the prior year period). Gross profit for the third fiscal quarter of fiscal 2013 was $407.6 million, or 42.1% of net sales, as compared to $303.3 million, or 34.9% of net sales for the prior year period. For the third fiscal quarter of 2013, selling, operating, and general and administrative expenses (SG&A) increased 23.4% to $214.3 million from $173.6 million for the prior year period. As a percentage of sales, SG&A expenses increased to 22.2% in the third fiscal quarter of 2013 from 20.0% in the prior year period. Our operating margin improved to 20.0% in the third fiscal quarter of 2013 from 14.9% in the prior year period.
We continually monitor all costs, including coffee, as we review our pricing structure as cyclical swings in commodity markets are common. The recent years have seen significant volatility in the C price of coffee (i.e., the price per pound quoted by the Intercontinental Exchange). We expect coffee prices to remain volatile in the coming years. To help mitigate this volatility, we generally fix the price of our coffee contracts for approximately three fiscal quarters, and at times four fiscal quarters, prior to delivery so that we have the ability to adjust our sales prices to marketplace conditions if required.
We offer a one-year warranty on all Keurig® Single Cup Brewers we sell and provide for the estimated cost of product warranties, primarily using historical information and current repair or replacement costs, at the time product revenue is recognized. In addition, sales of Keurig® Single Cup Brewers are recognized net of an allowance for returns using an average return rate based on historical experience and an evaluation of contractual rights or obligations. We focus some of our research and development efforts on improving brewer reliability, strengthening its quality controls and product testing procedures. As we have grown, we have added significantly to our product testing, quality control infrastructure and overall quality processes. As we continue to innovate, and our products become more complex, both in design and componentry, product performance may modulate, causing warranty or sales returns rates to possibly fluctuate going forward. As a result, future warranty claims rates may be higher or lower than we are currently experiencing and for which we are currently providing for in our warranty or sales return reserves.
We generated $772.2 million in cash from operating activities during the thirty-nine weeks ended June 29, 2013 as compared to $488.2 million during the thirty-nine weeks ended June 23, 2012. During the thirty-nine weeks ended June 29, 2013 we primarily used cash generated from operating activities to reduce our borrowings under long-term debt obligations by $232.9 million, fund capital expenditures of $190.4 million and repurchase shares of our common stock for $125.7 million.
We consistently analyze our short-term and long-term cash requirements to continue to grow the business. We expect that most of our cash generated from operations will continue to be used to fund capital expenditures and the working capital required for our growth over the next few years.
Business Segments
We have historically managed our operations through three business segments: the Specialty Coffee business unit (SCBU), the Keurig business unit (KBU) and the Canadian business unit. Effective as of and as initially disclosed on May 8, 2013, our Board of Directors authorized a reorganization which consolidated U.S. operations to bring greater organizational efficiency and coordination across the Company. Due to this combination, the results of U.S. operations, formerly reported in the SCBU and KBU segments, are reported in the Domestic segment and the results of Canadian operations are in the Canada segment. See Note 4, Segment Reporting, of the Notes to Unaudited Consolidated Financial Statements included in this Quarterly Report.
We evaluate the performance of our 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. Our 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 our 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 social responsibility expenses, interest expense not directly attributable to an operating segment, the majority of foreign exchange gains or losses, certain corporate legal expenses and compensation of the Board of Directors.
Effective for the first quarter of fiscal 2013, we changed our measure for reporting segment profitability and for evaluating segment performance and the allocation of our resources from income before taxes to operating income (loss). Prior to the first quarter of fiscal 2013, we disclosed each operating and reporting segments income before taxes to report segment profitability. Segment disclosures for prior periods have been recast to reflect operating income by segment in place of income before taxes.
Basis of Presentation
Included in this presentation are discussions and reconciliations of net income and diluted earnings per share in accordance with accounting principles generally accepted in the United States of America (GAAP) to net income and diluted earnings per share excluding certain expenses and losses. We refer to these performance measures as non-GAAP net income and non-GAAP net income per share. These non-GAAP measures exclude transaction expenses related to the gain from the sale of Van Houtte USA Holdings, Inc., also known as the Van Houtte U.S. Coffee Service business, or Filterfresh, including the effect of any tax benefits resulting from the use of net operating and capital loss carryforwards as a result of the Filterfresh sale; legal and accounting expenses related to the Securities and Exchange Commission (SEC) inquiry and pending securities and stockholder derivative class action litigation; and non-cash acquisition-related items such as amortization of identifiable intangibles, each of which include adjustments to show the tax impact of excluding these items. Each of these adjustments was selected because management uses these non-GAAP measures in discussing and analyzing its results of operations and because we believe the non-GAAP measures provide investors with greater transparency by helping to illustrate the underlying financial and business trends relating to our results of operations and financial condition and comparability between current and prior periods. For example, we excluded acquisition-related transaction expenses because these expenses can vary from period to period and transaction to transaction and expenses associated with these activities are not considered a key measure of our operating performance.
We use the non-GAAP measures to establish and monitor budgets and operational goals and to evaluate our performance. These non-GAAP measures are not in accordance with, or an alternative to, GAAP and should be considered in addition to, and not as a substitute or superior to, the other measures of financial performance prepared in accordance with GAAP. Using only the non-GAAP financial measures to analyze our performance would have material limitations because their calculation is based on the subjective determination of management regarding the nature and classification of events and circumstances that investors may find significant. We compensate for these limitations by presenting both the GAAP and non-GAAP measures of its results.
Divestiture
On October 3, 2011, all the outstanding shares of Filterfresh 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.
Prior to October 3, 2011, Filterfresh was reported in our Canada segment.
Results of Operations
Summary financial data of the Company
The following table presents certain financial data of the Company expressed as a percentage of net sales for the periods denoted below:
|
|
Thirteen weeks ended |
|
Thirty-nine weeks ended |
| ||||
|
|
June 29, |
|
June 23, |
|
June 29, |
|
June 23, |
|
Net sales |
|
100.0 |
% |
100.0 |
% |
100.0 |
% |
100.0 |
% |
Cost of sales |
|
57.9 |
% |
65.1 |
% |
62.5 |
% |
67.3 |
% |
Gross profit |
|
42.1 |
% |
34.9 |
% |
37.5 |
% |
32.7 |
% |
|
|
|
|
|
|
|
|
|
|
Selling and operating expenses |
|
14.1 |
% |
13.6 |
% |
13.1 |
% |
12.7 |
% |
General and administrative expenses |
|
8.0 |
% |
6.4 |
% |
6.7 |
% |
5.4 |
% |
Operating income |
|
20.0 |
% |
14.9 |
% |
17.8 |
%* |
14.6 |
% |
|
|
|
|
|
|
|
|
|
|
Other income, net |
|
0.0 |
% |
0.0 |
% |
0.0 |
% |
0.1 |
% |
Gain (loss) on financial instruments, net |
|
0.5 |
% |
0.3 |
% |
0.3 |
% |
0.0 |
% |
(Loss) gain on foreign currency, net |
|
(1.1 |
)% |
(0.6 |
)% |
(0.6 |
)% |
0.0 |
% |
Gain on sale of subsidiary |
|
|
% |
|
% |
|
% |
0.9 |
% |
Interest expense |
|
(0.4 |
)% |
(0.7 |
)% |
(0.4 |
)% |
(0.6 |
)% |
Income before income taxes |
|
19.0 |
% |
14.0 |
%* |
17.1 |
% |
15.0 |
% |
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
(7.0 |
)% |
(5.6 |
)% |
(6.3 |
)% |
(5.6 |
)% |
Net income |
|
12.0 |
% |
8.5 |
%* |
10.8 |
% |
9.3 |
%* |
|
|
|
|
|
|
|
|
|
|
Net income attributable to noncontrolling interests |
|
0.0 |
% |
0.0 |
% |
0.0 |
% |
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
Net income attributable to GMCR |
|
12.0 |
% |
8.4 |
%* |
10.8 |
% |
9.3 |
% |
* Does not sum due to rounding.
Segment Summary
Net sales and operating income for each of our operating segments are summarized in the tables below:
|
|
Net sales (in millions) |
| ||||||||||
|
|
Thirteen weeks ended |
|
Thirty-nine weeks ended |
| ||||||||
|
|
June 29, |
|
June 23, |
|
June 29, |
|
June 23, |
| ||||
Domestic |
|
$ |
822.6 |
|
$ |
719.8 |
|
$ |
2,820.1 |
|
$ |
2,438.0 |
|
Canada |
|
144.5 |
|
149.4 |
|
490.8 |
|
474.5 |
| ||||
Total net sales |
|
$ |
967.1 |
|
$ |
869.2 |
|
$ |
3,310.9 |
|
$ |
2,912.5 |
|
|
|
Operating income (loss) (in millions) |
| ||||||||||
|
|
Thirteen weeks ended |
|
Thirty-nine weeks ended |
| ||||||||
|
|
June 29, |
|
June 23, |
|
June 29, |
|
June 23, |
| ||||
Domestic |
|
$ |
213.1 |
|
$ |
125.4 |
|
$ |
644.0 |
|
$ |
423.3 |
|
Canada |
|
23.7 |
|
21.9 |
|
69.9 |
|
60.3 |
| ||||
Corporate |
|
(43.5 |
) |
(17.6 |
) |
(126.0 |
) |
(58.4 |
) | ||||
Total operating income |
|
$ |
193.3 |
|
$ |
129.7 |
|
$ |
587.9 |
|
$ |
425.2 |
|
Thirteen weeks ended June 29, 2013 as compared to the thirteen weeks ended June 23, 2012
Revenue
Company Summary
The following table presents consolidated net sales by major product category:
|
|
Net sales (in millions) |
|
|
|
|
| |||||
|
|
Thirteen weeks ended |
|
|
|
|
| |||||
|
|
June 29, |
|
June 23, |
|
$ Increase |
|
% Increase |
| |||
Single serve packs |
|
$ |
751.7 |
|
$ |
638.0 |
|
$ |
113.7 |
|
18 |
% |
Brewers and accessories |
|
133.1 |
|
139.1 |
|
(6.0 |
) |
(4 |
)% | |||
Other products and royalties |
|
82.3 |
|
92.1 |
|
(9.8 |
) |
(11 |
)% | |||
Total net sales |
|
$ |
967.1 |
|
$ |
869.2 |
|
$ |
97.9 |
|
11 |
% |
Net sales for the third quarter of fiscal 2013 increased by $97.9 million, or 11%, to $967.1 million. The primary drivers of the increase in our net sales were a $113.7 million, or 18%, increase in total single serve pack net sales partially offset by a $6.0 million, or 4%, decrease in Keurig® Single Cup Brewer and accessory sales, and a $9.8 million, or 11%, decrease in other products and royalties.
The increase in single serve pack net sales was driven by a 21 percentage point increase in sales volume and was offset by a 2 percentage point decrease due to net price realization and a 1 percentage point decrease due to single serve pack product mix. The decrease in brewer and accessories net sales was driven by a shift in brewer sales mix to lower-priced models.
Domestic
Domestic segment net sales increased by $102.8 million, or 14%, to $822.6 million in the third quarter of fiscal 2013 as compared to $719.8 million in the prior year period. The increase is due primarily to a $104.0 million, or 18%, increase related to sales of single serve packs.
Canada
Canada segment net sales decreased by $4.9 million, or 3%, to $144.5 million in the third quarter of fiscal 2013 as compared to $149.4 million in the prior year period. The decrease is due primarily to (i) a $4.0 million, or 21%, decrease related to sales of Keurig® Single Cup Brewers and accessories, and (ii) a decrease of $10.7 million, or 17%, in sales of other products, such as coffee sold in traditional package formats, partially offset by a $9.8 million, or 14%, increase related to the sale of single serve packs, driven by a demand shift from coffee sold in traditional package formats to single serve packs.
Gross Profit
Gross profit for the third quarter of fiscal 2013 was $407.6 million, or 42.1% of net sales as compared to $303.3 million, or 34.9% of net sales, in the prior year period. Gross margin increased approximately (i) 370 basis points due a decrease in green coffee costs in the third quarter of fiscal 2013 compared to the prior year period, (ii) 130 basis points due to lower labor and overhead manufacturing costs related to the Companys manufacturing facilities in the third quarter of fiscal 2013 compared to the prior year period, (iii) 100 basis points due to lower sales returns primarily related to Keurig® Single Cup Brewers in the third quarter of fiscal 2013 compared to the prior year period, (iv) 90 basis points due to a sales shift in our product mix away from the sale of Keurig® Single Cup Brewers that are sold approximately at cost, or sometimes at a loss when factoring in the incremental costs related to sales, and towards the sales of Keurig® single serve packs in the third quarter of fiscal 2013 compared to the prior year, and (v) 80 basis points due to a change in estimate for charges related to a non-coffee purchase commitment. The increase in gross margin was partially offset by a
120 basis point decrease related to the net price realization primarily associated with single serve packs in the third quarter of fiscal 2013 compared to the prior year period.
Selling, Operating, General and Administrative Expenses
SG&A expense increased by 23% to $214.3 million in the third quarter of fiscal 2013 from $173.6 million in the prior year period. As a percentage of sales, SG&A increased to 22.2% in the third quarter of fiscal 2013 from 20.0% in the prior year period. The increase in SG&A over the prior year period is primarily attributed to increases of $10.7 million in marketing and promotional expenses, $4.4 million in research and development expenses, $2.4 million in corporate social responsibility expenses, and increases in general and administrative expenses, primarily $7.3 million in incentive compensation, $6.6 million of expenses primarily related to infrastructure and logistics and business and information systems, and $3.2 million in depreciation and amortization of fixed assets.
Gain (Loss) on Financial Instruments, Net
We recorded $4.4 million in net gains on financial instruments not designated as hedges for accounting purposes during the third quarter of fiscal 2013 as compared to $3.0 million in net gains during the prior year period. The net gains were primarily attributable to the fair value adjustment of our cross currency swap, which hedges the risk in currency movements on an intercompany note denominated in Canadian currency.
(Loss) Gain on Foreign Currency, Net
We have certain assets and liabilities that are denominated in Canadian currency. During the third quarter of fiscal 2013, we incurred net foreign currency losses of approximately $10.4 million as compared to net losses of $5.1 million during the prior year period. The net foreign currency losses primarily related to re-measurement of certain intercompany notes with our foreign subsidiaries which fluctuate due to the relative strength or weakness of the U.S. dollar against the Canadian dollar.
Interest Expense
Interest expense was $3.9 million in the third quarter of fiscal 2013, as compared to $6.2 million in the prior year period. The decrease in interest expense was primarily due to lower average outstanding debt in the third quarter of fiscal 2013 as compared to the average outstanding debt during the prior year period.
Income Taxes
Our effective income tax rate was 36.6% for the third quarter of fiscal 2013 as compared to a 39.6% effective tax rate for the prior year period. The decrease was due primarily to a $4.6 million provision-to-file adjustment in the third quarter of fiscal 2013.
Net Income, Non-GAAP Net Income and Diluted Earnings Per Share (EPS)
Net income in the third quarter of fiscal 2013 was $116.3 million, an increase of $43.0 million or 59%, as compared to $73.3 million in the prior year period.
Non-GAAP net income (when excluding non-cash related items such as amortization of identifiable intangibles and legal and accounting expenses related to the SEC inquiry and pending securities and stockholder derivative class action litigation) increased 50% to $124.7 million for the third quarter of fiscal 2013 from $82.9 million non-GAAP net income in the prior year period.
Diluted EPS was $0.76 per share in the third quarter of fiscal 2013, as compared to $0.46 per share in the prior year period.
Non-GAAP diluted EPS was $0.82 per share in the third quarter of fiscal 2013, as compared to $0.52 per share in the prior year period.
The following tables show a reconciliation of net income and diluted EPS to non-GAAP net income and non-GAAP diluted EPS for the thirteen weeks ended June 29, 2013 and June 23, 2012 (in thousands, except per share data):
|
|
Thirteen weeks ended |
| ||||
|
|
June 29, 2013 |
|
June 23, 2012 |
| ||
Net income attributable to GMCR |
|
$ |
116,272 |
|
$ |
73,296 |
|
After tax: |
|
|
|
|
| ||
Expenses related to SEC inquiry (1) |
|
657 |
|
1,759 |
| ||
Amortization of identifiable intangibles (2) |
|
7,746 |
|
7,876 |
| ||
Non-GAAP net income attributable to GMCR |
|
$ |
124,675 |
|
$ |
82,931 |
|
|
|
Thirteen weeks ended |
| ||||
|
|
June 29, 2013 |
|
June 23, 2012 |
| ||
Diluted income per share |
|
$ |
0.76 |
|
$ |
0.46 |
|
After tax: |
|
|
|
|
| ||
Expenses related to SEC inquiry (1) |
|
0.00 |
|
0.01 |
| ||
Amortization of identifiable intangibles (2) |
|
0.05 |
|
0.05 |
| ||
Non-GAAP net income per share |
|
$ |
0.82 |
* |
$ |
0.52 |
|
* Does not sum due to rounding.
(1) Represents legal and accounting expenses, net of income taxes of $0.4 million and $1.2 million for each of the thirteen weeks ended June 29, 2013 and June 23, 2012, respectively, related to the SEC inquiry and pending securities and stockholder derivative class action litigation classified as general and administrative expense. See Note 15, Legal Proceedings, of the Notes to Unaudited Consolidated Financial Statements included in this Quarterly Report. Income taxes were calculated at our effective tax rate.
(2) Represents the amortization of intangibles, net of income taxes of $3.5 million and $3.6 million for each of the thirteen weeks ended June 29, 2013 and June 23, 2012, related to our acquisitions classified as general and administrative expense. Income taxes were calculated at our deferred tax rates.
Thirty-nine weeks ended June 29, 2013 as compared to the thirty-nine weeks ended June 23, 2012
Revenue
Company Summary
The following table presents consolidated net sales by major product category:
|
|
Net Sales (in millions) |
|
|
|
|
| |||||
|
|
Thirty-nine weeks ended |
|
|
|
|
| |||||
|
|
June 29, |
|
June 23, |
|
$ Increase |
|
% Increase |
| |||
Single serve packs |
|
$ |
2,409.4 |
|
$ |
2,008.7 |
|
$ |
400.7 |
|
20 |
% |
Brewers and accessories |
|
637.2 |
|
609.7 |
|
27.5 |
|
5 |
% | |||
Other products and royalties |
|
264.3 |
|
294.1 |
|
(29.8 |
) |
(10 |
)% | |||
Total net sales |
|
$ |
3,310.9 |
|
$ |
2,912.5 |
|
$ |
398.4 |
|
14 |
% |
Net sales for the thirty-nine weeks ended June 29, 2013 (the 2013 YTD period) increased by $398.4 million, or 14%, to $3,310.9 million, as compared to $2,912.5 million reported for the thirty-nine weeks ended June 23, 2012 (the prior YTD period). The primary drivers of the increase in our net sales were a $400.7 million, or 20%, increase in total single serve pack net sales and a $27.5 million, or 5%, increase in Keurig® Single Cup Brewer and accessory sales, offset by a $29.8 million, or 10%, net decrease in other products and royalties.
The increase in single serve pack net sales was driven by a 24 percentage point increase in sales volume, and was offset by a 3 percentage point decrease due to single serve pack product mix and a 1 percentage point decrease due to net price realization.
Domestic
Domestic segment net sales increased by $382.1 million, or 16%, to $2,820.1 million in the 2013 YTD period as compared to $2,438.0 million in the prior YTD period. The increase is due primarily to a $367.2 million, or 20%, increase related to sales of single serve packs.
Canada
Canada segment net sales increased by $16.3 million, or 3%, to $490.8 million in the 2013 YTD period, as compared to $474.5 million in the prior YTD period. The increase is due primarily to (i) a $33.6 million, or 16%, increase related to the sales of single serve packs, partially offset by a $23.8 million, or 12%, decrease in sales of other products, such as coffee sold in traditional package formats, driven by a demand shift from coffee sold in traditional package formats to single serve packs, and (ii) a $6.5 million, or 9%, increase related to sales of Keurig® Single Cup Brewers and accessories.
Gross Profit
Gross profit for the 2013 YTD period was $1,241.9 million, or 37.5% of net sales, as compared to $953.0 million, or 32.7% of net sales, in the prior year period. Gross margin increased approximately (i) 260 basis points due to a decrease in green coffee costs in the 2013 YTD period compared to the prior YTD period, (ii) 110 basis points due to lower labor and overhead manufacturing costs related to the Companys manufacturing facilities in the 2013 YTD period compared to the prior YTD period, (iii) 90 basis points due to the decrease in warranty related expenses in the 2013 YTD period compared to the prior YTD period, and (iv) 80 basis points due to lower obsolescence expense of finished goods and raw materials in the 2013 YTD period compared to the prior YTD period. The increase in gross margin was partially offset by a 90 basis point decrease in net price realization primarily associated with single serve packs in the 2013 YTD period compared to the prior YTD period.
Selling, Operating, General and Administrative Expenses
SG&A expense increased by 24% to $654.0 million in the YTD period from $527.8 million in the prior YTD period. As a percentage of sales, SG&A increased to 19.8% in 2013 YTD period from 18.1% in the prior YTD period. The increase in SG&A over the prior year period is primarily attributed to increases of $46.8 million in marketing and promotional expenses, $6.9 million in research and development expenses, $6.8 million in corporate social responsibility expenses, and increases in general and administrative expenses, primarily $18.2 million in incentive compensation, $9.9 million of expenses primarily related to infrastructure and logistics and business and information systems, and $7.7 million in depreciation and amortization of fixed assets.
Gain (Loss) on Financial Instruments
We recorded $9.0 million in net gains on financial instruments not designated as hedges for accounting purposes during the 2013 YTD period as compared to $0.2 million in net losses during the prior YTD period. For both the 2013 and prior YTD periods, the net gains and losses were primarily attributable to the fair value adjustment of our cross currency swap, which hedges the risk in currency movements on an intercompany note denominated in Canadian currency.
(Loss) Gain on Foreign Currency, Net
We have certain assets and liabilities that are denominated in Canadian currency. During the 2013 YTD period, we incurred a net foreign currency loss of $19.2 million as compared to a net gain of $1.2 million during the prior YTD period. The net foreign currency loss and gain were primarily attributable to re-measurement of certain intercompany notes with our foreign subsidiaries which fluctuate due to the relative strength or weakness of the U.S. dollar against the Canadian dollar.
Gain on Sale of Subsidiary
On October 3, 2011, we sold all the outstanding shares of the Filterfresh business resulting in a gain of $26.3 million.
Interest Expense
Interest expense was $13.5 million in the 2013 YTD period, as compared to $18.7 million in the prior YTD period. The decrease in interest expense was primarily due to lower average outstanding debt during the thirty-nine weeks ended June 29, 2013 as compared to the average outstanding debt during the prior year period.
Income Taxes
Our effective income tax rate was 36.8% for the 2013 YTD period, as compared to a 37.7% effective tax rate in the prior YTD period. The lower effective tax rate for the 2013 YTD period was due primarily to discrete items including a $3.7 million tax benefit related to increased stock option activity for the 2013 YTD period and a $2.9 million research and development credit catch-up adjustment from fiscal 2012 due to the enactment of the American Taxpayer Relief Act of 2012 on January 2, 2013. We expect our fiscal 2013 annual effective tax rate to be approximately 37%.
Net Income, Non-GAAP Net Income and Diluted Earnings Per Share (EPS)
Net income in the 2013 YTD period was $356.3 million, an increase of $85.5 million or 32%, as compared to $270.7 million in the prior YTD period.
Non-GAAP net income (when excluding non-cash related items such as amortization of identifiable intangibles, legal and accounting expenses related to the SEC inquiry and pending securities and stockholder derivative class action litigation, and the gain from the sale of Filterfresh) increased 36% to $381.6 million for the 2013 YTD period from $280.6 million non-GAAP net income in the prior YTD period.
Diluted EPS was $2.33 per share in the 2013 YTD period, as compared to $1.70 per share in the prior YTD period.
Non-GAAP diluted EPS was $2.50 per share in the 2013 YTD period, as compared to $1.76 per share in the prior YTD period.
The following tables show a reconciliation of net income and diluted EPS to non-GAAP net income and non-GAAP diluted EPS for the thirty-nine weeks ended June 29, 2013 and June 23, 2012 (in thousands, except per share data):
|
|
Thirty-nine weeks ended |
| ||||
|
|
June 29, 2013 |
|
June 23, 2012 |
| ||
Net income attributable to GMCR |
|
$ |
356,276 |
|
$ |
270,741 |
|
After tax: |
|
|
|
|
| ||
Expenses related to SEC inquiry (1) |
|
1,773 |
|
2,889 |
| ||
Amortization of identifiable intangibles (2) |
|
23,523 |
|
23,658 |
| ||
Gain on sale of subsidiary (3) |
|
|
|
(16,685 |
) | ||
Non-GAAP net income attributable to GMCR |
|
$ |
381,572 |
|
$ |
280,603 |
|
|
|
Thirty-nine weeks ended |
| ||||
|
|
June 29, 2013 |
|
June 23, 2012 |
| ||
Diluted income per share |
|
$ |
2.33 |
|
$ |
1.70 |
|
After tax: |
|
|
|
|
| ||
Expenses related to SEC inquiry (1) |
|
0.01 |
|
0.02 |
| ||
Amortization of identifiable intangibles (2) |
|
0.15 |
|
0.15 |
| ||
Gain on sale of subsidiary (3) |
|
|
|
(0.10 |
) | ||
Non-GAAP net income per share |
|
$ |
2.50 |
* |
$ |
1.76 |
* |
* Does not sum due to rounding.
(1) Represents legal and accounting expenses, net of income taxes of $1.0 million and $1.9 million for the thirty-nine weeks ended June 29, 2013 and June 23, 2012, respectively, related to the SEC inquiry and pending securities and stockholder derivative class action litigation classified as general and administrative expense. See Note 15, Legal Proceedings, of the Notes to Unaudited Consolidated Financial Statements included in this Quarterly Report. Income taxes were calculated at our effective tax rate.
(2) Represents the amortization of intangibles, net of income taxes of $10.7 million and $10.8 million for the thirty-nine weeks ended June 29, 2013 and June 23, 2012, respectively, related to our acquisitions classified as general and administrative expense. Income taxes were calculated at our deferred tax rates.
(3) Represents the gain recognized on the sale of Filterfresh, net of income taxes of $9.6 million. Income taxes were calculated at our effective tax rate.
Liquidity and Capital Resources
We principally have funded our operations, working capital needs, capital expenditures and share repurchases from net cash flows from operating activities and borrowings under our credit facilities and capital lease and financing obligations. At June 29, 2013, we had $317.3 million in outstanding debt, and capital lease and financing obligations, $352.2 million in cash and cash equivalents and $924.1 million of working capital (including cash). At September 29, 2012, we had $531.5 million in outstanding debt and capital lease and financing obligations, $58.3 million in cash and cash equivalents and $803.0 million of working capital (including cash).
Operating Activities:
Net cash provided by operating activities is principally comprised of net income and is primarily affected by the net change in working capital and non-cash items relating to depreciation and amortization.
Net cash provided by operating activities during the thirty-nine weeks ended June 29, 2013 was $772.2 million as compared to $488.2 million for the same period last year. We generated $357.0 million in net income for the thirty-nine weeks ended June 29, 2013. Significant non-cash items primarily consisted of $172.0 million in depreciation and amortization. Other significant changes in assets and liabilities affecting net cash provided by operating activities were decreases in inventories of $175.5 million.
Investing Activities:
Investing activities primarily include capital expenditures for equipment and building improvements.
Capital expenditures were $190.4 million for the thirty-nine weeks ended June 29, 2013 as compared to $305.5 million for the comparable prior year period. In addition, during the thirty-nine weeks ended June 29, 2013, we acquired fixed assets of $23.5 million under capital lease and financing obligations. Capital expenditures incurred on an accrual basis during the thirty-nine weeks ended June 29, 2013 consisted primarily of $63.7 million related to increasing packaging capabilities for the Keurig® brewer platforms, $27.5 million related to facilities and related infrastructure, $33.4 million related to information technology infrastructure and systems, and $16.3 million related to coffee processing and other equipment. In fiscal 2013, we currently expect to invest between $275.0 million to $325.0 million in capital expenditures to support our future growth.
Cash flows used in investing activities for the thirty-nine weeks ended June 23, 2012 included $137.7 million received from the sale of Filterfresh. On October 3, 2011, we sold all of the outstanding shares of Filterfresh to ARAMARK for $142.1 million in cash and transferred $4.4 million of cash to ARAMARK as part of the sale, resulting in net cash inflow of $137.7 million.
Financing Activities:
Cash used in financing activities for the thirty-nine weeks ended June 29, 2013 totaled $292.5 million. Cash generated from operations was used to reduce our debt and capital lease obligations by $235.4 million, principally under our revolving line of credit. We also used $125.7 million of cash to repurchase approximately 4.9 million of shares of our common stock during the first and second quarters of fiscal 2013. Cash flows from operating and financing activities included a $47.8 million tax benefit primarily from the exercise of non-qualified options and disqualifying dispositions of incentive stock options. As stock is issued from the exercise of options and the vesting of restricted stock units, we will continue to receive proceeds and a tax deduction where applicable; however we cannot predict either the amounts or the timing of any such proceeds or tax benefits.
Under our Amended and Restated Credit Agreement (Restated Credit Agreement), we maintain senior secured credit facilities consisting of (i) an $800.0 million U.S. revolving credit facility, (ii) a $200.0 million alternative currency revolving credit facility, and (iii) a term loan A facility. At June 29, 2013, we had $235.9 million outstanding under the term loan A facility, no balances outstanding under the revolving credit facilities and $5.0 million in letters of credit with $995.0 million available for borrowing. The Restated Credit Agreement also provides for an increase option for an aggregate amount of up to $500.0 million.
The term loan A facility requires quarterly principal repayments. The term loan and revolving credit borrowings bear interest at a rate equal to an applicable margin plus, at our option, either (a) a eurodollar rate determined by reference to the cost of funds for deposits for the interest period and currency relevant to such borrowing, adjusted for certain costs, or (b) a base rate determined by reference to the highest of (1) the federal funds rate plus 0.50%, (2) the prime rate announced by Bank of America, N.A. from time to time and (3) the eurodollar rate plus 1.00%. The applicable margin under the Restated Credit Agreement with respect to the term loan A and revolving credit facilities is a percentage per annum varying from 0.5% to 1.0% for base rate loans and 1.5% to 2.0% for eurodollar rate loans, based upon our leverage ratio. Our average effective interest rate as of June 29, 2013 and September 29, 2012 was 3.0% and 2.9%, respectively, excluding amortization of deferred financing charges and interest on capital leases and financing obligations, and including the effect of interest rate swap agreements. We also pay a commitment fee on the average daily unused portion of the revolving credit facilities.
All of our assets and the assets of our domestic wholly-owned material subsidiaries are pledged as collateral under the Restated Credit Agreement. The Restated Credit Agreement contains customary negative covenants, subject to certain exceptions, including limitations on: liens; investments; indebtedness; mergers and consolidations; asset sales; dividends and distributions or repurchases of our capital stock; transactions with affiliates; certain burdensome agreements; and changes in our lines of business.
The Restated Credit Agreement requires us to comply on a quarterly basis with a consolidated leverage ratio and a consolidated interest coverage ratio. At June 29, 2013, we were in compliance with these covenants. In addition, the Restated Credit Agreement contains certain mandatory prepayment requirements and customary events on default.
We are party to interest rate swap agreements, the effect of which is to limit the interest rate exposure on a portion of the loans under our credit facilities to a fixed rate versus the 30-day Libor rate. The total notional amount of these swaps at June 29, 2013 was $130.0 million.
The fair market value of the interest rate swaps is the estimated amount that we would receive or pay to terminate the agreements at the reporting date, taking into account current interest rates and the credit worthiness of the counterparty. At June 29, 2013, we estimate we would have paid $6.3 million (gross of tax), if we terminated the interest rate swap agreements. We designate the interest rate swap agreements as cash flow hedges and the changes in the fair value of these derivatives are classified in accumulated other comprehensive income (a component of equity). During the thirteen weeks ended June 29, 2013 and June 23, 2012, we incurred $0.8 million and $1.2 million, respectively, in additional interest expense pursuant to interest rate swap agreements. During the thirty-nine weeks ended June 29, 2013 and June 23, 2012, we incurred $2.7 million and $3.5 million, respectively, in additional interest expense pursuant to interest rate swap agreements.
On July 30, 2012, our Board of Directors authorized a program (repurchase program) for the Company to repurchase up to $500.0 million of our common shares over two years, at such times and prices as determined by our management. The shares will be purchased with cash on hand, cash from operations, and funds available through our existing credit facility. See Note 13, Stockholders Equity, of the Notes to Unaudited Consolidated Financial Statements included in this Quarterly Report.
We believe that our cash flows from operating activities, existing cash and our credit facilities will provide sufficient liquidity to pay all liabilities in the normal course of business, fund anticipated capital expenditures, service debt requirements through the next 12 months, and fund any purchases of our common shares under the repurchase program. We continuously evaluate our capital requirements and access to capital. We may opt to raise additional capital through equity and/or debt financing to provide flexibility to assist with managing several risks and uncertainties inherent in a growing business including potential future acquisitions or increased capital expenditure requirements.
A summary of cash requirements related to our outstanding long-term debt, future minimum lease payments and purchase commitments is as follows (in thousands):
|
|
Long-Term |
|
Interest |
|
Operating |
|
Capital Lease |
|
Financing |
|
Purchase |
|
Total |
| |||||||
Remainder of 2013 |
|
$ |
35 |
|
$ |
1,782 |
|
$ |
4,507 |
|
$ |
1,407 |
|
$ |
369 |
|
$ |
523,057 |
|
$ |
531,157 |
|
FY 2014 - FY 2015 |
|
32,037 |
|
13,694 |
|
30,729 |
|
13,812 |
|
10,874 |
|
359,455 |
|
460,601 |
| |||||||
FY 2016 - FY 2017 |
|
205,411 |
|
2,767 |
|
18,931 |
|
9,977 |
|
19,160 |
|
194,100 |
|
450,346 |
| |||||||
Thereafter |
|
602 |
|
60 |
|
23,367 |
|
35,817 |
|
123,387 |
|
79,577 |
|
262,810 |
| |||||||
Total |
|
$ |
238,085 |
|
$ |
18,303 |
|
$ |
77,534 |
|
$ |
61,013 |
|
$ |
153,790 |
|
$ |
1,156,189 |
|
$ |
1,704,914 |
|
(1) Based on rates in effect at June 29, 2013. Does not include interest on amounts outstanding under the USD and multicurrency revolving credit facilities.
(2) Includes principal and interest payments.
(3) Represents portion of the future minimum lease payments allocated to the building which are recognized as reductions to the financing obligation and interest expense upon completion of construction.
In addition, we have $22.1 million in unrecognized tax benefits primarily as the result of acquisitions of which we are indemnified for $14.1 million expiring through June 2015. We are unable to make reasonably reliable estimates of the period of cash settlement, if any, due to the uncertain nature of the unrecognized tax benefits.
Recent Accounting Pronouncements
In March 2013, the Financial Accounting Standards Board (the FASB) issued an Accounting Standards Update (ASU) No. 2013-05, Foreign Currency Matters (Topic 830): Parents 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 are effective prospectively for reporting periods beginning after December 15, 2013, and early adoption is permitted. The adoption of ASU 2013-05 is not expected to have an impact on our 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 are effective for reporting periods beginning after December 15, 2013, with early adoption permitted. Retrospective application is required. The adoption of ASU 2013-04 is not expected to have a material impact on our net income, financial position or cash flows.
In February 2013, the FASB issued ASU No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Comprehensive Income (ASU 2013-02). ASU 2013-02 requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under GAAP to be reclassified in its entirety to net income. For significant items not reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures that provide additional detail about those amounts. The amendments in this ASU are effective for annual reporting periods, and interim periods within those annual reporting periods, beginning after December 15, 2012, which will be the first quarter of our fiscal year 2014. The adoption of ASU 2013-02 is not expected to have an impact on our net income, financial position or cash flows.
In December 2011, the FASB issued ASU No. 2011-11, Disclosures about Offsetting Assets and Liabilities (ASU 2011-11) that provides amendments for disclosures about offsetting assets and liabilities. The amendments require an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. Entities are required to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. On January 31, 2013, the FASB issued ASU No. 2013-01, Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities, which clarified that the scope of the disclosures is limited to include derivatives, sale and repurchase agreements and reverse sale and repurchase agreements, and securities borrowing and securities lending arrangements. The amendments are effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. Disclosures required by the amendments should be provided retrospectively for all comparative periods presented. For us, the amendments are effective for the fiscal year ending September 27, 2014 (fiscal year 2014). We have not adopted the amendments and are currently evaluating the impact these amendments may have on our disclosures.
Factors Affecting Quarterly Performance
Historically, we have experienced variations in sales and earnings from quarter to quarter due to the holiday season (October through December) and a variety of other factors, including, but not limited to, general economic trends, the cost of green coffee, competition, marketing programs, weather, product quality and special or unusual events. Because of the seasonality of our business, results for any quarter are not necessarily indicative of the results that may be achieved for the full fiscal year.
Forward-Looking Statements
Certain information contained in this filing, including statements concerning expected performance such as those relating to net sales, earnings, cost savings, acquisitions, brand marketing support, and changes to the organizational and leadership structures are forward-looking statements. Generally, these statements may be identified by the use of words such as may, will, would, expect, should, anticipate, estimate, believe, forecast, intend, plan and similar expressions intended to identify forward-looking statements. These statements may relate to: the expected impact of raw material costs and our pricing actions on our results of operations and gross margins, expected trends in net sales and earnings performance and other financial measures, the expected productivity and working capital improvements, the ability to maximize or successfully assert our intellectual property rights, the success of introducing and producing new product offerings, ability to attract and retain senior management, the impact of foreign exchange fluctuations, the adequacy of internally generated funds and existing sources of liquidity, such as the availability of bank financing, the expected results of operations of businesses acquired by us, our ability to issue debt or additional equity securities, our expectations regarding purchasing shares of our common stock under the existing authorizations, organizational efficiencies, and the impact of the inquiry initiated by the SEC and any related litigation or additional governmental inquiry or enforcement proceedings.
These and other forward-looking statements are based on managements current views and assumptions and involve risks and uncertainties that could significantly affect expected results. Results may be materially affected by external factors such as damage to our reputation or brand name, business interruptions due to natural disasters or similar unexpected events, actions of competitors, customer relationships and financial condition, the ability to achieve expected cost savings and margin improvements, the acquisition and integration of new businesses, fluctuations in the cost and availability of raw and packaging materials, successful execution of internal changes to the organizational and leadership structures, changes in regulatory requirements, and global economic conditions generally which would include the availability of financing, interest, inflation rates and investment return on retirement plan assets, as well as foreign currency fluctuations, risks associated with our information technology systems, the threat of data breaches or cyber-attacks, and other risks described in our filings with the SEC.
Actual results could differ materially from those projected in the forward-looking statements. We undertake no obligation to update or revise publicly, any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required by law.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risks relating to our operations result primarily from changes in interest rates and the commodity C price of coffee (the price per pound quoted by the Intercontinental Exchange). To address these risks, we enter into hedging transactions as described below. We do not use financial instruments for trading purposes.
For purposes of specific risk analysis, we use sensitivity analysis to determine the impacts that market risk exposures may have on our financial position or earnings.
Interest Rate Risks
The table below provides information about our debt obligations, some of which are sensitive to changes in interest rates. The table presents principal cash flows and weighted average interest rates by fiscal year:
|
|
Remainder |
|
|
|
|
|
|
|
|
|
|
|
Total Debt |
| |||||||
|
|
of 2013 |
|
2014 |
|
2015 |
|
2016 |
|
2017 |
|
Thereafter |
|
June 29, 2013 |
| |||||||
Long-term debt: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Variable rate (in thousands) |
|
$ |
|
|
$ |
12,500 |
|
$ |
18,750 |
|
$ |
74,687 |
|
$ |
|
|
$ |
|
|
$ |
105,937 |
|
Average interest rate |
|
|
% |
1.7 |
% |
1.7 |
% |
1.7 |
% |
|
% |
|
% |
1.7 |
% | |||||||
Fixed rate (in thousands) |
|
$ |
35 |
|
$ |
394 |
|
$ |
393 |
|
$ |
130,354 |
|
$ |
370 |
|
$ |
602 |
|
$ |
132,148 |
|
Average interest rate |
|
4.0 |
% |
4.0 |
% |
4.0 |
% |
4.0 |
% |
3.9 |
% |
3.9 |
% |
4.0 |
% |
At June 29, 2013, we had $105.9 million of outstanding debt obligations subject to variable interest rates. Should all our variable interest rates increase by 100 basis points, we would incur additional interest expense of $1.1 million annually. Additionally, should Canadian Bankers Acceptance Rates increase by 100 basis points over US Libor rates, we would incur additional interest expense of $1.2 million annually, pursuant to the cross-currency swap agreement (see Foreign Currency Exchange Risk below). As discussed further under the heading Liquidity and Capital Resources, we are party to interest rate swap agreements. On June 29, 2013, the effect of our interest rate swap agreements was to limit the interest rate exposure on $130.0 million of the outstanding balance of the term loan A facility under the Restated Credit Agreement to a fixed rate versus the 30-day Libor rate. The total notional amount covered by these swaps will terminate in November 2015.
Commodity Price Risks
The C price of coffee is subject to substantial price fluctuations caused by multiple factors, including weather and political and economic conditions in coffee-producing countries. Our gross profit margins can be significantly impacted by changes in the C price of coffee. We enter into fixed coffee purchase commitments in an attempt to secure an adequate supply of coffee. These agreements are tied to specific market prices (defined by both the origin of the coffee and the time of delivery) but we have significant flexibility in selecting the date of the market price to be used in each contract. We generally fix the price of our coffee contracts nine to twelve months prior to delivery, so that we can adjust our sales prices to the marketplace. At June 29, 2013, we had approximately $270.4 million in green coffee purchase commitments, of which approximately 86% had a fixed price.
In addition, we regularly use commodity-based financial instruments to hedge price-to-be-established coffee purchase commitments with the objective of minimizing cost risk due to market fluctuations. These hedges generally qualify as cash flow hedges. Gains and losses are deferred in other comprehensive income until the hedged inventory sale is recognized in earnings, at which point gains and losses are added to cost of sales. At June 29, 2013, we held outstanding futures contracts covering 6.3 million pounds of coffee with a fair market value of $(0.9) million, gross of tax. At September 29, 2012, we held outstanding futures contracts covering 3.2 million pounds of coffee with a fair market value of $(0.3) million, gross of tax.
At June 29, 2013, we are exposed to approximately $38.0 million in un-hedged green coffee purchase commitments that do not have a fixed price as compared to $31.6 million in un-hedged green coffee purchase commitments that did not have a fixed price at September 29, 2012. A hypothetical 10% movement in the C price would increase or decrease our financial commitment for these purchase commitments outstanding at June 29, 2013 by approximately $3.8 million.
Foreign Currency Exchange Rate Risk
Our foreign operations are primarily related to our Canada segment, which is subject to risks, including, but not limited to, unique economic conditions, changes in political climate, differing tax structures, other regulations and restrictions, and foreign exchange rate volatility. Accordingly, our future results could be materially adversely affected by changes in these or other factors. We also source our green coffee, certain production equipment, and components of our brewers and manufacturing of our brewers from countries outside the United States, which are subject to the same risks described for Canada above; however, most of our green coffee and brewer purchases are transacted in the United States dollar.
The majority of the transactions conducted by our Canada segment are in the Canadian dollar. As a result, our revenues are adversely affected when the United States dollar strengthens against the Canadian dollar and are positively affected when the United States dollar weakens against the Canadian dollar. Conversely, our expenses are positively affected when the United States dollar strengthens against the Canadian dollar and adversely affected when the United States dollar weakens against the Canadian dollar.
As described in Note 10, Derivative Financial Instruments, in the Notes to Unaudited Consolidated Financial Statements contained in Item 1 of this Quarterly Report on Form 10-Q, from time to time we engage in transactions involving various derivative instruments to mitigate our foreign currency rate exposures. More specifically, we hedge, on a net basis, the foreign currency exposure of a portion of our assets and liabilities that are denominated in Canadian dollars. These contracts are recorded at fair value and are not designated as hedging instruments for accounting purposes. As a result, the changes in fair value are recognized in the Gain (loss) on financial instruments, net line in the Unaudited Consolidated Statements of Operations. We do not engage in speculative transactions, nor do we hold derivative instruments for trading purposes.
At June 29, 2013, we had approximately three years remaining on a CDN $120.0 million cross-currency swap that was not designated as a hedging instrument for accounting purposes, which largely offsets the financial impact of the re-measurement of an intercompany note receivable denominated in Canadian dollars for the same amount. Principal payments on the cross-currency swap are settled on an annual basis to match the repayments on the note receivable and the cross-currency swap is adjusted to fair value each period. Increases or decreases in the cross-currency swap are generally offset by corresponding decreases or increases in the U.S. dollar value of the Canadian dollar intercompany note. We also have some naturally occurring hedges where increases or decreases in the foreign currency exchange rates on other intercompany balances denominated in Canadian dollars, are largely offset by increases or decreases associated with Canadian dollar-denominated borrowings under our alternative currency revolving credit facility.
In addition, we occasionally use foreign currency forward contracts to hedge certain capital purchase liabilities for production equipment with the objective of minimizing cost risk due to market fluctuations. We designate these contracts as fair value hedges and measure 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. We had no outstanding foreign currency forward contracts at June 29, 2013.
Movements in foreign currency exchange rates exposes us to market risk resulting from the re-measurement of our net assets that are denominated in a currency different from the functional currency of the entity in which they are held. The market risk associated with the foreign currency exchange rate movements on foreign exchange contracts is expected to mitigate the market risk of the underlying obligation being hedged. Based on our net un-hedged assets that are affected by movements in foreign currency exchange rates as of June 29, 2013, a hypothetical 10% movement in the foreign currency exchange rate would result in a charge or credit to earnings of approximately $16.9 million. In addition, at June 29, 2013 our net investment in our foreign subsidiaries with a functional currency different from our reporting currency was approximately $605.9 million. A hypothetical 10% movement in the foreign currency exchange rate would increase or decrease our net investment in our foreign subsidiaries by approximately $60.6 million with a corresponding charge to other comprehensive income.
Item 4. Controls and Procedures
As of June 29, 2013, our management with the participation of our Chief Executive Officer and Chief Financial Officer conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 and 15d-15 under the Securities Exchange Act of 1934, as amended (the Exchange Act). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures (as defined in Rule 13a-15 of the Exchange Act) are effective.
There have been no changes in our internal control over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
On October 1, 2010, Keurig, Incorporated, a wholly-owned subsidiary of the Company (Keurig), filed suit against Sturm Foods, Inc. (Sturm) in the United States District Court for the District of Delaware (Civil Action No. 1:10-CV-00841-SLR) for patent and trademark infringement, false advertising, and other claims, related to Sturms sale of Grove Square beverage cartridges that claim to be compatible with Keurig® brewers. On September 13, 2012, the District Court rendered a summary judgment decision in favor of Sturm on the patent side of the suit. Keurig has since appealed to the United States Federal Circuit Court of Appeals the District Courts summary judgment decision, and oral argument for that appeal is scheduled to take place before the Federal Circuit on August 6, 2013. Separately, on February 19, 2013, Keurig and Sturm entered into a settlement agreement with respect to the trademark infringement, false advertising, and other claims at issue in the suit, all of which have now been dismissed. The settlement agreement did not materially impact our consolidated financial results of operations.
On November 2, 2011, Keurig filed suit against JBR, INC., d/b/a Rogers Family Company (Rogers) in the United States District Court for the District of Massachusetts (Civil Action No. 1:11-cv-11941-MBB) for patent infringement related to Rogers sale of San Francisco Bay beverage cartridges for use with Keurig® brewers. The suit alleges that the San Francisco Bay cartridges violate Keurig patents (U.S. Patent Nos. D502,362, 7,165,488 and 7,347,138). Keurig sought an injunction prohibiting Rogers from selling these cartridges, as well as money damages. In late 2012, Rogers moved for summary judgment of no infringement as to all three asserted patents. On May 24, 2013, the District of Massachusetts granted Rogers summary judgment motions. Keurig has since appealed the Courts ruling to the Federal Circuit, and that appeal is currently pending.
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-c v-00189-WJM-KMT) for patent infringement related to the making, using, importing, selling and/or offering for sale of K-Cup® packs containing tea. The suit alleges that the Company, Keurig and Starbucks are violating 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 its Manufacturing, Sales and Distribution Agreement with Starbucks, the Company is defending and indemnifying Starbucks in connection with the suit. On March 13, 2012, the Company and Keurig, for themselves and Starbucks, filed an answer with the court, generally denying all of Teashots allegations. The Company and Keurig, for themselves and Starbucks, are vigorously defending this lawsuit. 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. No hearing on the summary judgment motions has 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.
SEC Inquiry
As first disclosed on September 28, 2010, the staff of the SECs Division of Enforcement continues to conduct an inquiry into matters at the Company. The Company is cooperating fully with the SEC staffs inquiry.
Stockholder Litigation
Three putative securities fraud class actions have been filed against the Company and certain of its officers and directors along with two putative stockholder derivative actions. The first consolidated putative securities fraud class action was commenced following the Companys disclosure of the SEC inquiry on September 28, 2010. The second putative securities fraud class action was filed on November 29, 2011, and the third putative securities fraud class action was filed on May 7, 2012. A consolidated putative stockholder derivative action pending in the United States District Court for the District of Vermont consists of five separate putative stockholder derivative complaints, the first two were filed after the Companys 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. In addition, a putative stockholder derivative action is pending in the Superior Court of the State of Vermont for Washington County that was commenced following the Companys disclosure of the SEC inquiry on September 28, 2010.
The first consolidated putative securities fraud class action, organized under the caption Horowitz v. Green Mountain Coffee Roasters, Inc., Civ. No. 2:10-cv-00227, is pending in the United States District Court for the District of Vermont before the Honorable William K. Sessions, III. The underlying complaints in the consolidated action allege violations of the federal securities laws in connection with the Companys disclosures relating to its revenues and its forward guidance. The complaints include counts for violation of Section 10(b) of the Exchange Act and Rule 10b-5 against all defendants, and for violation of Section 20(a) of the Exchange Act against the officer defendants. The plaintiffs seek to represent all purchasers of the Companys securities between July 28, 2010 and September 28, 2010 or September 29, 2010. The complaints seek class certification, compensatory damages, equitable and/or injunctive relief, attorneys fees, costs, and such other relief as the court should deem just and proper. Pursuant to the Private Securities Litigation Reform Act of 1995, 15 U.S.C. § 78u-4(a)(3), plaintiffs had until November 29, 2010 to move the court to serve as lead plaintiff of the putative class. On December 20, 2010, the court appointed Jerzy Warchol, Robert M. Nichols, Jennifer M. Nichols, Marc Schmerler and Mike Shanley lead plaintiffs and approved their selection of Glancy Binkow & Goldberg LLP and Robbins Geller Rudman & Dowd LLP as co-lead counsel and the Law Office of Brian Hehir and Woodward & Kelley, PLLC as liaison counsel. On December 29, 2010 and January 3, 2011, two of the plaintiffs in the underlying actions in the consolidated
proceedings, Russell Blank and Dan M. Horowitz, voluntarily dismissed their cases without prejudice. Pursuant to a stipulated motion granted by the court on November 29, 2010, the lead plaintiffs filed a consolidated complaint on February 23, 2011, and defendants moved to dismiss that complaint on April 25, 2011. The court heard argument on the motions to dismiss on January 5, 2012. On January 27, 2012, the court issued an order granting defendants motions and dismissing the consolidated complaint without prejudice and the lead plaintiffs filed a motion for leave to amend the complaint on March 27, 2012. On April 9, 2012, the parties filed a stipulated motion for filing of the amended complaint and to set a briefing schedule for defendants motions to dismiss. Briefing on defendants motions to dismiss was completed on August 29, 2012. On March 20, 2013, the court granted defendants motions to dismiss the amended complaint and dismissed the amended complaint with prejudice. On April 19, 2013, the plaintiffs filed a notice appealing the courts ruling to the United States Court of Appeals for the Second Circuit. On July 24, 2013, plaintiff-appellants filed a motion to voluntarily dismiss the appeal with prejudice, which the appeals court granted on July 29, 2013.
The second 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 on November 29, 2011 and is also pending in the United States District Court for the District of Vermont before the Honorable William K. Sessions, III. Plaintiffs amended complaint alleges violations of the federal securities laws in connection with the Companys disclosures relating to its revenues and its inventory accounting practices. The amended complaint seeks class certification, compensatory damages, attorneys fees, costs, and such other relief as the court should deem just and proper. Plaintiffs seek to represent all purchasers of the Companys 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 Companys 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 Retirements System, Employees Retirements 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 does not allege any claims under the Securities Act against the Company, its officers and directors, or the Companys underwriters in connection with the May 2011 secondary common stock offering. Defendants moved to dismiss the amended complaint on March 1, 2013 and the briefing of their motions was completed on June 26, 2013. An oral argument on the defendants motions to dismiss is set for August 27, 2013. 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 third consolidated putative securities fraud class action, captioned Fifield v. Green Mountain Coffee Roasters, Inc., Civ. No. 2:12-cv-00091, is pending in the United States District Court for the District of Vermont before the Honorable William K. Sessions, III. Plaintiffs amended complaint alleges violations of the federal securities laws in connection with the Companys disclosures relating to its forward guidance. The amended complaint includes counts for violation of Section 10(b) of the Exchange Act and Rule 10b-5 against all defendants, and for violation of Section 20(a) of the Exchange Act against the officer defendants. The amended complaint seeks 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 seek to represent all purchasers of the Companys 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.
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 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 as Henry Cargo v. Robert P. Stiller, et al., Civ. No. 2:12-cv-00161, and granting plaintiffs leave to lift the stay for the limited purpose of filing a consolidated complaint. The consolidated complaint is asserted nominally on behalf of the Company against certain of its officers and directors. The consolidated complaint asserts claims for breach of fiduciary duty, waste of corporate assets, unjust enrichment, contribution, and indemnification and seeks compensatory damages, injunctive relief, restitution, disgorgement, attorneys 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, 2012, the parties filed a further joint stipulation continuing the temporary stay until the court either denies a motion to dismiss the LAMPERS punitive fraud class action or the LAMPERS punitive fraud class action is dismissed with prejudice.
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 courts 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. Defendants are due to move to dismiss or otherwise respond to the complaint on August 23, 2013.
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.
There have been no material changes from the risk factors disclosed in our fiscal 2012 Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
We did not repurchase any shares during the third quarter of fiscal 2013. As of June 29, 2013, $297.8 million remained available for shares to be repurchased under current authorization by our Board of Directors. On July 30, 2012, our Board of Directors authorized a program for the Company to repurchase up to $500.0 million of our common shares over two years, and at such times and prices as determined by the Companys management. See Note 13, Stockholders Equity, of the Notes to Unaudited Consolidated Financial Statements included in this Quarterly Report.
(a) Exhibits:
10.1 |
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Transition Agreement between Green Mountain Coffee Roasters, Inc., and Scott McCreary, dated May 23, 2013. |
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10.2 |
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Consultancy Agreement between Green Mountain Coffee Roasters, Inc., and Robert Stiller, dated June 19, 2013. |
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10.3 |
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Consultancy Agreement between Green Mountain Coffee Roasters, Inc., and Larry Blanford, dated June 19, 2013. |
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31.1 |
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Principal Executive Officer Certification Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as Adopted Pursuant to the Section 302 of the Sarbanes-Oxley Act of 2002. |
31.2 |
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Principal Financial Officer Certification Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as Adopted Pursuant to the Section 302 of the Sarbanes-Oxley Act of 2002. |
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32.1 |
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Principal Executive Officer Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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32.2 |
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Principal Financial Officer Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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101 |
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The following financial statements from the Companys Quarterly Report on Form 10-Q for the fiscal quarter ended June 29, 2013 formatted in eXtensible Business Reporting Language (XBRL): (i) the Unaudited Consolidated Balance Sheets, (ii) the Unaudited Consolidated Statements of Operations, (iii) the Unaudited Consolidated Statement of Changes in Stockholders Equity, (iv) the Unaudited Consolidated Statements of Comprehensive Income, (v) the Unaudited Consolidated Statements of Cash Flows and (vi) related notes. |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
GREEN MOUNTAIN COFFEE ROASTERS, INC. |
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Date: |
8/7/2013 |
By: |
/s/ Brian P. Kelley |
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Brian P. Kelley, |
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President and Chief Executive Officer |
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Date: |
8/7/2013 |
By |
/s/ Frances G. Rathke |
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Frances G. Rathke, |
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Chief Financial Officer |
Exhibit 10.1
[Green Mountain Coffee Roasters, Inc. Letterhead]
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May 23, 2013 |
Scott McCreary
Green Mountain Coffee Roasters
33 Coffee Lane
Waterbury, VT 05676
Re: Transition Agreement with Green Mountain Coffee Roasters, Inc.
Dear Scott:
Green Mountain Coffee Roasters, Inc. (Company), and you have agreed that you will transition from the Company and its affiliates on the terms set forth in this transition agreement.
1. Employment Period; Termination Date.
A. Employment Period.
1. Your role as President, Specialty Coffee Business Unit, and service as officer of the Company, will end on May 8, 2013. Your employment with the Company will continue until June 29, 2013 (the Transition Date), subject to earlier termination as provided herein.
2. Subject to earlier termination as provided below, at the close of business on the Transition Date, you will terminate your service as an employee of the Company, and such termination shall be deemed an involuntary termination not for cause, except as provided in Section 3. You will be deemed to have resigned from all your officer, director, and committee positions with the Company and all its affiliates as of May 8, 2013, the date your service as an officer of the Company ends. (The period of time between the date hereof and the Transition Date (or earlier Termination Date, as defined below) is hereinafter referred to as the Employment Period).
3. During the Employment Period you may terminate your employment and your services at any time for any reason, subject to the notice provision below. During the Employment Period the Company may terminate you only for gross misconduct.
4. Your termination date (Termination Date) is the last day that you perform services as an employee of the Company. In no event will your Termination Date be later than June 29, 2013. The occurrence of your Termination Date will also terminate the Employment Period. For avoidance of doubt, your Termination Date will be the Transition Date unless you previously die or voluntarily terminate your employment, or unless the Company terminates you for gross misconduct.
2. Duties and Compensation.
A. Employment duties. During the Employment Period, you will continue to perform your duties as assigned from time to time by the Companys President and Chief Executive Officer, faithfully, with the utmost loyalty, to the best of your abilities and in the best interests of the Company, and you shall devote your full business time to the business of the Company
B. Compensation. Subject to your execution of releases as provided in Section 7, and to your continued compliance with Section 8,
1. Base Salary. During the Employment Period, the Company will continue to pay you a base salary at the gross annual rate of $406,000 (Base Salary). The Base Salary shall be paid in accordance with the Companys normal payroll practices.
2. Pro Rata Annual Incentive. During the Employment Period, you will continue your participation in the Companys Short Term Incentive Plan (STIP) in accordance with its terms during the Companys fiscal year ending in 2013 (FY 2013). You shall be entitled to a pro rata portion of the annual incentive for FY 2013 under the STIP, in an amount equal to the amount payable based on actual performance if you had remained an employee throughout FY 2013, multiplied by a fraction (the Pro-Ration Fraction) the numerator of which is the number of days of your employment in FY 2013 prior to your Termination Date, and the denominator of which is 365, paid at the same time as other recipients receive their annual incentive payments for FY 2103 (the Pro-Rata 2013 Annual Incentive).
3. Benefit Plans.
a) During the Employment Period, you will continue to be eligible to participate in the Companys employee benefit plans (including the 401(k) plan, employee stock purchase plan, group medical and dental plans, and fringe benefits), and to receive fringe benefits and reimbursement of appropriate business expenses, all in accordance with Company plans and policies, as they may be in effect from time to time.
b) As of the earlier of the Transition Date or your Termination Date, you will no longer to be eligible to participate in employee benefit plans (including 401(k), employee stock purchase plan, group medical and dental plans, or fringe benefits), and your participation therein shall cease.
c) COBRA Payments. Subject to your having timely elected under the federal law known as COBRA to continue participation in the Companys group medical and dental plans for yourself and those individuals who were your eligible dependents immediately prior to the earlier of the Transition Date or your Termination Date, and subject to your making the required payments of the applicable COBRA premium, the Company will make monthly payments (COBRA Payments) in an amount equal to the difference between the monthly cost of such COBRA continuation coverage and the premium cost to you of participation in such group medical and dental plans had you remained in active employment. Provided you continue to pay the applicable COBRA premiums, such monthly COBRA Payments shall continue until the earlier of (a) 12 months from the earlier of the Transition Date or your Termination Date or (b) the date you (or in the case of your dependents, your dependents) become eligible for coverage under the medical and/or dental plan of another employer (or in the case of your dependents, cease to be eligible for COBRA continuation coverage).
4. Options PSUs and RSUs. During the Employment Period you will continue to vest in your options, performance stock units (PSUs) and restricted stock units (RSUs) in accordance with their terms, as amended from time to time, except as otherwise provided herein. For the avoidance of doubt, your provision of services hereunder through the Termination Date, regardless of role, shall be deemed Employment for purposes of the Companys 2006 Incentive Plan (2006 LTI Plan) and any awards granted thereunder. As of your Termination Date (whenever occurring), your outstanding options, PSUs and RSUs will be treated as provided under the terms of the respective award agreement (as amended from time to time) for an involuntary termination other than for Cause, except as otherwise herein provided. You shall not be eligible for Retirement treatment under such agreements.
5. During the Employment Period you will continue to be eligible for reimbursement of appropriate business expenses in accordance with Company policies, as they may be amended from time to time.
6. If your employment ends on the Transition Date, the Company will continue to pay your Base Salary, in accordance with the Companys normal payroll practices for the period from the Transition Date through June 29, 2014, except as otherwise provided herein.
C. Effective May 8, 2013,
1. Your participation in the Green Mountain Coffee Roasters, Inc. 2008 Change-In-Control Severance Benefit Plan, as amended (the Change in Control Severance Benefit Plan), shall cease;
2. You will not participate in the STIP for fiscal years ending after FY 2013; and
3. You will not be eligible for new or additional awards under the 2006 LTI Plan.
3. Early Termination.
A. You may terminate your employment hereunder at any time by written notice to the Chief Executive Officer of the Company. Your Termination Date shall be the date stated in such notice, but not earlier than 30 days after delivery of such notice to the Chief Executive Officer of the Company. The Companys sole obligation to you in the event of such termination shall be to pay you the Accrued Obligations (as defined in Section 5), to the extent not previously paid, and your options, PSUs and RSUs shall be treated as a voluntary resignation as provided in their respective grant agreements, as amended from time to time, except as otherwise provided herein.
B. The Company may terminate you for gross misconduct any time, effective immediately upon written notice. The Company acknowledges that as of the date of this Agreement it is not aware of circumstances that would constitute your gross misconduct. The date of such notice shall be the Termination Date. The Companys sole obligation to you in the event of such termination shall be to pay you the Accrued Obligations (as defined in Section 5), to the extent not previously paid.
Your equity awards shall thereupon be forfeited, whether or not vested, to the extent not previously exercised or settled, and shall be subject to Section 10.B.
C. In the event your services are terminated by your death prior to the Transition Date, the date of your death shall be the Termination Date and the Company will pay or provide your designated beneficiary (or if none, your estate) with the following, provided your designated beneficiary (or, if none, your executor) duly executes and does not revoke the Supplemental Release described in Section 7.B.:
1. The Accrued Obligations, to the extent not previously paid;
2. In lieu of your Pro-Rata 2013 Annual Incentive, a lump sum payment in respect of your FY 2013 STIP, in an amount equal to your target FY 2013 STIP multiplied by the Pro Ration Fraction, which shall be paid not more than 30 business days after your death; and
3. Treatment of your equity as described in the applicable grant agreement (as amended from time to time) in the event of termination of employment by death, except as otherwise provided herein.
4. Death after Termination Date. If your death occurs after your Termination Date but prior to the date you have received all payments to which you are entitled under Section 2.B.6., the Companys sole obligation to your designated beneficiary (or if none, your estate) will be (a) to accelerate the remaining such payments and to pay them in a lump sum as soon as administratively practical after your death, but in no event more than 30 business days after your death, and (b) if not previously paid, to pay your Pro-Rata 2013 Annual Incentive at the time and in the form described in Section 2.B.2.
5. Accrued Obligations. Whether or not you sign a Supplemental Release as provided in Section 7.B., the Company will pay or provide you the following (collectively, the Accrued Obligations):
A. Within five (5) business days after your Termination Date, the Company will pay you any earned but unpaid Base Salary through your Termination Date.
B. The Company will reimburse any unreimbursed business expenses existing on your Termination Date, in accordance with the Companys normal reimbursement policies and practices.
C. Effective as of the earlier of the Transition Date or your Termination Date, you may elect to continue group medical and dental coverage under the federal law known as COBRA, if and to the extent you are eligible to do so.
D. Within 5 days after the earlier of the Transition Date or your Termination Date, the Company will pay you any earned but unused vacation time as determined in accordance with the Companys policies then in effect.
E. You will be entitled to your vested account balance under and subject to the terms and provisions of the Companys 401(k) Plan, and any amount to which you may be entitled under the terms of the Companys employee stock purchase plan, as amended.
6. Change in Control.
A. After your Termination Date. If there should occur a change in control of the Company (as defined in the Companys Change in Control Severance Benefit Plan) that qualifies as a change in ownership of the Company or a change in effective control of the Company, or as a change in the ownership of a substantial portion of the assets of the Company under Treasury Regulation 1.409A-3(i)(5)(v), (vi), or (vii) (a 409A CIC) after your Termination Date, the Companys sole obligations to you will be, subject to the last sentence of this Section 6.A., to provide the following: (i) to accelerate the payment of any remaining payments to which you may be entitled as of the date of the 409A CIC under Section 2.B.6. and to pay them in a lump sum within five (5) business days after the 409A CIC, and (ii) if the 409A CIC occurs after your Termination Date and prior to the end of the applicable performance period under the FY 2013 STIP, then no amount shall be payable under Section 2.B.2., and you shall be entitled to a lump sum payment equal to the amount that would have been paid to you in respect of the FY 2013 STIP had you remained employed until the date of the 409A CIC pursuant to the relevant transaction documents, if any, multiplied by the Pro-Ration Fraction, such amount payable not later than five (5) business days after the 409A CIC. For avoidance of doubt, a change in control of the Company that is not a 409A CIC shall not affect the timing of payments hereunder.
B. On or Before your Termination Date. If there should occur a 409A CIC and your Termination Date has not previously occurred, then the date of the 409A CIC shall be your Termination Date; and you shall be paid the Accrued Obligations not later than five (5) business days after the 409A CIC, to the extent not previously paid. In addition, provided you sign and do not revoke the Supplemental Release as described in Section 7.B. and subject to your continued compliance with Section 8, the Company will pay or provide the following, in lieu of the amounts and form of payment applicable under Sections 2.B.6, 2.B.2., and/or 2.B.4., as applicable:
a) Remaining payments. In a lump sum not later than five (5) business days after the date of the 409A CIC, an amount equal to the sum of the remaining unpaid amounts under Section 2.B.6.;
b) FY 2013 STIP. To the extent no amount relating to your STIP for FY 2013 has previously been paid, an amount equal to your target annual bonus under the STIP for FY 2013 multiplied by the Pro Ration Fraction, in a lump sum not later than five (5) business days after the 409A CIC; and
c) Options, PSUs and RSUs. Your options, PSUs and RSUs to the extent not previously settled, will be treated as provided in the documents and instruments effecting the 409A CIC; provided that if the options, PSUs and RSUs are not assumed by the acquireror survivor in the transaction, your unvested equity shall become fully vested immediately prior to the CIC so that you have an opportunity to exercise any outstanding options and participate in the 409A CIC transaction the same as any common shareholder with respect to your equity.
7. Release; Supplemental Releases.
A. Release. The effectiveness of this transition agreement is contingent on your timely execution and non-revocation of a release and waiver of claims in the form attached hereto as Appendix A (Release). If you do not timely execute the Release or if you revoke it, then you will be deemed to have involuntarily terminated your employment and your service with the Company and its affiliates as of the date of this transition agreement. In that case, this transition agreement shall be null and void, and any payments of compensation or provision of benefits after the date of this transition agreement and the last date for non-revocation of the Release shall be deemed made pursuant to the terms of your September 10, 2004 employment letter from the Company.
B. Supplemental Releases. As a condition of receiving any benefits other than the Accrued Obligations after your Termination Date, you agree to execute within 21 days after your Termination Date and not revoke, a separate supplemental release and waiver of claims in the form attached hereto as Appendix B (Supplemental Release).
C. No Payments until Release Irrevocable. Payments and benefits conditioned upon the execution and nonrevocation of the Release or Supplemental Release shall not be made or commence, notwithstanding any other provision of this transition agreement to the contrary, prior to the expiration of the revocation period for the Release or Supplemental Release, as applicable. Upon the expiration of the applicable revocation period for the Release or Supplemental Release, any payments or benefits so postponed shall be cumulated and paid the day after the expiration of such revocation period; provided you have not revoked the Release or Supplemental Release.
8. Confidentiality; Restrictive Covenants.
A. Need for Restrictive Covenants. You acknowledge that, as a senior executive of the Company, you have and, prior to the Termination Date, will acquire and have access to, and have and will, prior to the Termination Date, continue to develop substantial and intimate knowledge of, the Companys Confidential Information, as defined below, and that you have and will, prior to the Termination Date, also continue to develop a unique and comprehensive familiarity with the Company and the business conducted by the Company and its affiliates, which you would not have otherwise had but for your employment with the Company, and which you acknowledge are valuable assets of the Company. Accordingly, in consideration of the foregoing and of entering into this transition agreement, you agree to undertake the obligations set forth in Sections 8.B., C. and D., which you acknowledge are reasonably designed to protect the legitimate business interests of the Company, without unreasonably restricting your post-employment employment opportunities.
B. Confidentiality. You acknowledge that you have and, prior to the Termination Date, will continue to have access to Confidential Information of the Company, its affiliates, and the Foundation. All Confidential information is of irreplaceable value to the Company, its affiliates, and the Foundation. Except as required to perform your responsibilities for the Company, its affiliates, or the Foundation, to comply with law or regulation, or as authorized in writing in advance by the Chief Executive Officer of the Company, you will not, at any time, use, disclose or take any action which may result in the use or disclosure of any Confidential Information. Confidential Information means all confidential and proprietary information of the Company or its affiliates, and includes, but is not limited to actual and prospective customer and client lists and pricing information, business plans, programs and tactics, research and development information, personnel information, and all other information unique to the Company and not readily available to the public, including designs, improvements, inventions, formulas, compilations, methods, strategies, capabilities, forecasts, software programs, processes, know-how, data, operating methods and techniques, and all business costs, profits, vendors, markets, sales, products, marketing, sales or other financial or business information, and any modifications or enhancements of any of the foregoing.
C. Restrictive Covenants. You agree and covenant not to, without the explicit written permission of the Chief Executive Officer of the Company:
1. contribute your knowledge, directly or indirectly, in whole or in part, as an employee, officer, owner, manager, advisor, consultant, agent, partner, director, shareholder, volunteer, intern or in any other similar capacity to an entity engaged in the same or similar business as of June 29, 2013 as the Company and its affiliates anywhere in the United States for a period of 12 months following your Termination Date;
2. directly or indirectly, solicit, hire, recruit, attempt to hire or recruit, or induce the termination of employment of any employee of the Company or its affiliates for 12 months following your Termination Date; or
3. directly or indirectly, solicit, contact (including, but not limited to, e-mail, regular mail, express mail, telephone, fax, instant message, or tweet) attempt to contact or meet with any current customer of the Company or any of its affiliates for purposes of offering or accepting goods or services similar to or competitive with those currently offered by the Company or any of its affiliates for a period of 12 months following your Termination Date.
D. Nondisparagement. You agree (a) not to make issue, circulate, publish or utter any statement, whether written or oral, to any third party or take any action or cause or assist another person to do so, which is intended to or would reasonably have the effect of being false or of disparaging, defaming, criticizing, holding in a negative light or reflecting adversely upon the Company (including its current and former parents, subsidiaries, affiliates, successors, assigns, directors, officers, shareholders, employees, agents, products, services or practices, and the Foundation), and (b) not to publish, comment upon or disseminate any statements suggesting or accusing the Company, any of its affiliates or the Foundation, or any of their respective agents, employees or officers of any misconduct or unlawful behavior. The Company agrees to direct its executive officers (x) not to make issue, circulate, publish or utter any statement, whether written or oral, to any third party or take any action or cause or assist another person to do so, which is intended to or would reasonably have the effect of being false or of disparaging, defaming, criticizing, holding in a negative light or reflecting adversely upon you, and (y) not to publish, comment upon or disseminate any statements suggesting or accusing you of any misconduct or unlawful behavior. Notwithstanding the foregoing, you and the Companys executive officers may give truthful and non-malicious testimony if properly subpoenaed to testify under oath, and truthfully and non-maliciously cooperate in investigations by governmental or regulatory authorities. You agree to direct all inquiries from prospective employers, the media or, after your Termination Date, governmental or regulatory authorities to the Companys Chief Human Resources Officer.
E. Company Property. As soon as practicable following your Termination Date, you will return to the Company all keys, key cards, Confidential Information, documents, manuals, computers, computer programs, flash drives, CDs, diskettes or other recording media, customer lists, notebooks, reports and other written or graphic materials, including all copies thereof and whether in electronic form or otherwise, relating in any way to the Companys business and prepared by your or obtained by your from the Company, its customers or suppliers during the course of your provision of services to the Company. You covenant that you will retain no copies of any such material.
F. Remedies on Breach. In the event of a breach or, with respect to (3) below, threatened breach of any of the foregoing covenants (including Sections 8.B., C., D. and E hereof),
1. Any unvested portion of your outstanding options, PSUs and RSUs shall be forfeited effective as of the date of such breach, unless sooner terminated by operation of another term or condition of this transition agreement or the applicable plan; and
2. Any amounts due to be paid under Section 2.B. shall be forfeited as of the date of such breach, and any amounts previously paid under Section 2.B. shall be subject to recoupment (to the extent permitted by applicable law); and
3. The Company shall be entitled to seek, in addition to other available remedies, a temporary or permanent injunction or other equitable relief against such breach or threatened breach from any court of competent jurisdiction, without the necessity of showing any actual damages or that money damages would not afford an adequate remedy, and without the necessity of posting any bond or other security. Such equitable relief shall be in addition to, and not in lieu of, legal remedies, monetary damages or other available forms of relief.
9. Litigation and Regulatory Cooperation. You agree to reasonably cooperate with the Company and its affiliates after the Transition Date in the defense or prosecution of any claims or actions now in existence or which may be brought in the future against or on behalf of the Company or any of its affiliates that relate to events or occurrences that transpired during the time you provided services to the Company, including but not limited to pending matters, whether asserted as litigation, threatened litigation, an internal investigation or complaint, or any investigation or review by any foreign, federal, state or local regulatory authority. Your full cooperation in connection with such claims or actions shall include, but not be limited to, being available at reasonable times and reasonable places to (a) meet with and provide truthful and accurate information to counsel for the Company and its affiliates as part of the Companys investigation of such matters, (b) meet with governmental officials to provide accurate and truthful information on behalf of the Company or an affiliate, (c) prepare for discovery or trial, and (d) act as a witness on behalf of the Company or any affiliate and provide truthful testimony as may be required. In scheduling your time to prepare for such meetings and conferences, and any appearances for discovery or trial, the Company shall take into account your personal and professional obligations and shall use reasonable efforts to minimize interference with any other employment obligations that you may have, provided that you shall also use reasonable efforts to accommodate the schedule of the Company and its counsel. You will be entitled, upon delivery of customary supporting documentation, to reimbursement for reasonable out-of-pocket travel expenses approved in advance, and other expenses approved in advance by the Company, including but not limited to reasonable counsel fees and costs you incur in connection with the foregoing.
10. Additional provisions.
A. Withholding; Deductions. Any payments to you are subject to required withholding and authorized deductions.
B. Recoupment.
1. Recoupment provisions in any documents or any Company policy applicable to you shall remain in effect.
2. If there is a material adjustment of financial results for fiscal year 2013 or fiscal year 2014 (the Adjusted Financial Statements), and the Board of Directors of the Company (the Board) or a committee thereof determines that as a result of such adjustment materially more compensation was paid to you under the FY 2013 STIP, and/or materially more PSUs were granted to you, than if the Adjusted Financial Statements had been the financial statements originally reported, the Board or a committee thereof may require you to (a) reimburse the Company for any incentive paid to you under the FY2013 STIP in excess of what would have been paid to you under the Adjusted Financial Statements, and (b) forfeit any or all PSUs granted to you in excess of what would have been granted to you under the Adjusted Financial Statements (including any shares of Common Stock issued to you upon such PSUs vesting).
3. In addition, your FY 2013 STIP and PSUs shall be subject to recoupment by the Company to the extent required to comply with (a) applicable law or regulation or the rules of the stock exchange on which the Companys common stock is traded or (b) any other applicable clawback or recoupment policy as required by law.
C. Compliance with Section 409A.
1. To the extent this transition agreement provides for compensation that is deferred compensation subject to Section 409A, it is intended that you not be subject to the imposition of taxes and penalties (409A Penalties) under Section 409A, and this transition agreement shall be construed in accordance with that intent.
2. Notwithstanding any other provision in this transition agreement, if as of the date on which you incur a separation from service within the meaning of Section 409A, you are a specified employee as determined by the Company, then to the extent any amount payable or benefit provided to you that the Company reasonably determines would be nonqualified deferred compensation within the meaning of Section 409A, for which payment is triggered by your separation from service (other than on account of death), and that under the terms of this transition agreement would be payable on or prior to the six-month anniversary of your separation from service, such payment or benefit shall be delayed until the earlier to occur of (a) the day after the six-month anniversary of such separation from service, or (b) the date of your death.
3. With respect to any reimbursements under this transition agreement, such reimbursement shall be made on or before the last day of the calendar year following the calendar you in which the expense was incurred; subject to timely submission of proper substantiation in accordance with the Companys policies and procedures therefor.
4. The amount of any expenses eligible for reimbursement of the amount of any in-kind benefits provided, as the case may be, under this transition agreement during any calendar year shall not affect the amount of expenses eligible for reimbursement or the amount of any in-kind benefits provided during any other calendar year. The right to reimbursement or to any in-kind benefit pursuant to this transition agreement shall not be subject to liquidation or exchange for any other benefit.
5. If under this transition agreement, an amount is to be paid in two or more installments or two or more monthly payments, then for purposes of Code Section 409A, each installment shall be treated as a separate payment.
6. If payment of any amount of deferred compensation subject to Section 409A is contingent upon your execution of a release and waiver of claims, and if the period within which you must sign and not revoke the release and waiver of claims would begin in one calendar year and expire in the following calendar year, then any payments contingent on such employment-related action shall be made (or commence) in such following calendar year (regardless of the year of execution of such release) if payment in such following calendar year is required in order to avoid 409A Penalties.
7. You acknowledge that notwithstanding this Section 10.C. or any other provision of this transition agreement, the Company and its affiliates are not providing you with any tax advice with respect to Section 409A or otherwise, and are not making any guarantees or other assurances of any kind to you with respect to the tax consequences or treatment of any amounts paid or payable to you under this transition agreement or your equity award agreements. You are solely responsible for the payment of taxes, including any 409A Penalties.
D. Entire Agreement. This transition agreement constitutes the entire agreement between you and the Company and its affiliates on the subject of any payments and benefits due to you after the date hereof, and supersedes all other prior agreements between you and the Company or its affiliates, except for your options granted on April 1, 2006, June 14, 2007, March 13, 2008, March 12, 2009, March 11, 2010, March 10, 2011, March 22, 2012 and March 7, 2013, your Restricted Stock Units granted March 22, 2012 and March 7, 2013, and your Performance Stock Units granted on March 7, 2013, which shall continue to apply (as amended from time to time), except as otherwise provided herein, and are hereby made a part of this transition agreement by reference. Specifically, but not exclusively, your September 10, 2004 employment letter is superseded in its entirety, and the Change in Control Severance Benefit Plan does not apply to you. The payments and benefits described in this transition agreement will be the only such payments and benefits you are to receive in connection with the termination of your employment and your separation from service with the Company and its affiliates, and you acknowledge you are not entitled to any additional payments, rights or benefits not otherwise described in this transition agreement. Any payments, rights or benefits you receive under this transition agreement will not be taken into account for purposes of determining benefits under any employee benefit plan of the Company, except to the extent required by law, or as otherwise expressly provided under the terms of such plan.
E. Binding on Successors to the Company; Non-assignment. This transition agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. You shall not assign or otherwise alienate your rights under this transition agreement.
F. Governing Law. The validity, interpretation, construction, and performance of this transition agreement shall be governed by the laws of the State of Vermont without regard to its principles of conflicts of law, and except to the extent preempted by federal law.
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G. Severability. In the event that any one or more of the provisions of this transition agreement shall be or become invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions of this transition agreement shall not be affected thereby, provided that if any portion of the Release or the Supplemental Release shall be or become invalid, illegal or unenforceable in any respect, the Company shall be relieved of its obligations hereunder that are contingent on your execution and non-revocation of the Release or Supplemental Release.
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Sincerely, | |
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GREEN MOUNTAIN COFFEE ROASTERS, INC. | |
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/s/ Brian P. Kelley |
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Brian P. Kelley, Chief Executive Officer | |
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ACKNOWLEDGED AND AGREED |
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/s/ Scott McCreary |
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Scott McCreary |
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Date: May 23, 2013 |
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Appendix A
Release and Waiver
THIS RELEASE is executed by the undersigned (the Executive) as of the date indicated below.
WHEREAS, the Executive and Green Mountain Coffee Roasters, Inc. (the Company) entered into a transition agreement dated May 23, 2013 (the Transition Agreement), subject to the Executives timely execution and non-revocation of this Release and to his compliance with its terms and the terms of the Transition Agreement;
NOW, THEREFORE, in consideration of the Companys entering into the Transition Agreement and other good and valuable consideration, the Executive agrees as follows:
1. Executive irrevocably and unconditionally releases, acquits, and forever discharges the Company and all of its current and former related entities, affiliates, successors, predecessors, assigns, owners, investors, stockholders, partners, members, and employee benefit plans, and all of their directors, officers, employees, agents, representatives, insurers, administrators, attorneys, and all persons acting by, through, under, or in concert with any of them (collectively Releasees), from any and all charges, complaints, claims, liabilities, obligations, promises, agreements, damages, actions, causes of action, suits, rights, demands, costs, losses, debts, and expenses (including attorneys fees and costs) of any nature whatsoever, known or unknown, suspected or unsuspected (Claim or Claims), which Executive now has, owns or holds, or claims to have, own or hold, or which Executive at any time heretofore had, owned or held, or claimed to have had, owned or held, or which Executive at any time hereafter may have, own or hold, or claim to have, own or hold, against any of the Releasees relating to any event, act, or omission that has occurred prior to or as of the date Executive signs this Release. This Release shall not apply to (a) any of the Companys obligations under the terms of the Transition Agreement, and (b) Executives right to indemnification under the Companys bylaws and the indemnification agreement between the Company and Executive dated August 10, 2009.
2. Without limiting the foregoing, Executive specifically waives and releases all rights, claims (including claims for attorneys fees), demands, and causes of action under the Age Discrimination in Employment Act of 1967 (ADEA), as amended; Title VII of the Civil Rights Act of 1964, as amended; the Employee Retirement Income Security Act of 1974, as amended; the Rehabilitation Act of 1973, as amended; the Worker Adjustment Retraining and Notification Act; the Americans with Disabilities Act; and any comparable state law, concerning Executives relationship and association with any of the Releasees and the creation and termination of such relationship. Executive acknowledges and understands that the release of claims under the ADEA is subject to special waiver protection under 29 U.S.C. § 626(f).
a. In accordance with that section, Executive specifically agrees he is knowingly and voluntarily releasing and waiving any right or claim of discrimination under the ADEA.
b. In particular, he acknowledges and understands the following:
(i) he is not waiving rights or claims for age discrimination under the ADEA that may arise after the date he signs this Release;
(ii) he is not waiving his right to file a complaint or charge with the EEOC or participate in any investigation or proceeding conducted by the EEOC;
(iii) he is waiving rights or claims for age discrimination under the ADEA in exchange for entering into the Transition Agreement, which is in addition to anything of value to which he otherwise is entitled;
(iv) he has been advised to consult with an attorney of his choice before signing this Release, and he has had an opportunity to do so;
(v) he has freely and voluntarily entered into this Release without any threat, coercion, or intimidation by any person;
(vi) he has been given the opportunity to take 21 days to consider whether to sign this Release, although he is not required to wait 21 days; and
(vii) he will have seven days after the date he signs this Release within which to revoke it, and the Release shall not become effective or enforceable as to any party until that revocation period has expired without revocation of the Release. Any such revocation shall be in writing and shall be sent to Linda Longo Kazanova, Vice President, Chief Human Resources Officer, at the Companys headquarters at 33 Coffee Lane, Waterbury, VT 05676.
3. The Executive understands that nothing in this Release shall be construed to prohibit him from filing a charge with, or participating in any investigation or proceeding conducted by, the Equal Employment Opportunity Commission, National Labor Relations Board, and/or any federal, state or local agency. Notwithstanding the foregoing, the Executive hereby waives any and all rights to recover monetary damages in any charge, complaint, or lawsuit filed by him or by anyone else on his behalf based on events occurring prior to the date of this Release.
4. Executive expressly acknowledges that this Release is intended to include in its effect, without limitation, all Claims which he does not know or suspect to exist in his favor at the time of execution hereof and that this Release contemplates the extinguishment of any such Claim or Claims.
5. Executive agrees that he is bound by the provisions of the Transition Agreement, which are fully incorporated into this Release.
6. Executive represents that he has not heretofore assigned or transferred, or purported to assign or transfer, to any person or entity, any Claim or any portion thereof, or interest therein, and he agrees to indemnify, defend and hold Releasees harmless from and against any and all Claims, based on or arising out of any such assignment or transfer, or purported assignment or transfer of any Claims or any portion thereof or interest therein.
7. Executive represents and acknowledges that in executing this Release he does not rely and has not relied upon any representation or statement not set forth herein made by any of the Releasees or by any of the Releasees agents, representatives, or attorneys with regard to the subject matter, basis, or effect of this Release or otherwise.
8. This Release shall be binding upon Executive and upon his respective heirs, administrators, representatives, executors, beneficiaries, successors, and assigns, and shall inure to the benefit of Releasees and each of them, and to their heirs, administrators, representatives, executors, successors, and assigns.
9. This Release is made and entered into in the State of Vermont and shall in all respects be interpreted, enforced, and governed under the laws of the State of Vermont. The language of all parts of this Release shall in all cases be construed as a whole, according to its fair meaning, and not strictly for or against any of the parties. It is agreed that this Agreement shall be construed with the understanding that both parties were responsible for drafting it.
10. Capitalized terms used herein and not defined shall have the meanings ascribed to them in the Transition Agreement.
11. Should any of the provisions of this Release be declared or be determined to be illegal or invalid, the validity of the remaining parts, terms, or provisions shall not be affected thereby, and said illegal or invalid part, term, or provision shall be deemed not to be a part of this Release.
12. The signed Release must be returned to Linda Longo Kazanova, Vice President, Chief Human Resources Officer, at the Companys headquarters at 33 Coffee Lane, Waterbury, VT 05676 on or before June 13, 2013. If Executive does not revoke the Release within seven days after signing it, then the Release will take effect as a legally binding document on the expiration of the seventh day after signing.
PLEASE READ CAREFULLY. THIS RELEASE AND WAIVER INCLUDES A RELEASE OF ALL KNOWN OR UNKNOWN CLAIMS.
Executed at South Burlington (city), Vermont (state) this 13th day of June, 2013.
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/s/ Scott McCreary |
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Scott McCreary |
Received at South Burlington, Vermont this day of , 2013.
Green Mountain Coffee Roasters, Inc.
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/s/ Linda Longo Kazanova |
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Printed Name: Linda Longo Kazanova |
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Title: Vice President, Chief Human Resources Officer |
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Appendix B
Supplemental Release and Waiver
THIS SUPPLEMENTAL RELEASE is executed by the undersigned (the Executive) as of the date indicated below.
WHEREAS, the Executive and Green Mountain Coffee Roasters, Inc. (the Company) entered into a transition agreement dated May 23, 2013 (the Transition Agreement), under which Executive is entitled to certain payments and benefits following his Termination Date (as defined in the Transition Agreement), subject to the Executives timely execution and non-revocation of this Supplemental Release and to his compliance with its terms; and
WHEREAS, a the Termination Date has occurred;
NOW, THEREFORE, in consideration of the payments and provision of benefits as provided in the Transition Agreement, and other good and valuable consideration, the Executive agrees as follows:
1. Executive irrevocably and unconditionally releases, acquits, and forever discharges the Company and all of its current and former related entities, affiliates, successors, predecessors, assigns, owners, investors, stockholders, partners, members, and employee benefit plans, and all of their directors, officers, employees, agents, representatives, insurers, administrators, attorneys, and all persons acting by, through, under, or in concert with any of them (collectively Releasees), from any and all charges, complaints, claims, liabilities, obligations, promises, agreements, damages, actions, causes of action, suits, rights, demands, costs, losses, debts, and expenses (including attorneys fees and costs) of any nature whatsoever, known or unknown, suspected or unsuspected (Claim or Claims), which Executive now has, owns or holds, or claims to have, own or hold, or which Executive at any time heretofore had, owned or held, or claimed to have had, owned or held, or which Executive at any time hereafter may have, own or hold, or claim to have, own or hold, against any of the Releasees relating to any event, act, or omission that has occurred prior to or as of the date Executive signs this Supplemental Release. This Supplemental Release shall not apply to (a) any of the Companys obligations under the terms of this Supplemental Release, or (b) Executives right to indemnification under the Companys bylaws and the indemnification agreement between the Company and Executive dated August 10, 2009.
2. Without limiting the foregoing, Executive specifically waives and releases all rights, claims (including claims for attorneys fees), demands, and causes of action under the Age Discrimination in Employment Act of 1967 (ADEA), as amended; Title VII of the Civil Rights Act of 1964, as amended; the Employee Retirement Income Security Act of 1974, as amended; the Rehabilitation Act of 1973, as amended; the Worker Adjustment Retraining and Notification Act; the Americans with Disabilities Act; and any comparable state law, concerning Executives relationship and association with any of the Releasees and the creation and termination of such relationship. Executive acknowledges and understands that the release of claims under the ADEA is subject to special waiver protection under 29 U.S.C. § 626(f).
a. In accordance with that section, Executive specifically agrees he is knowingly and voluntarily releasing and waiving any right or claim of discrimination under the ADEA.
b. In particular, he acknowledges and understands the following:
(i) he is not waiving rights or claims for age discrimination under the ADEA that may arise after the date he signs this Supplemental Release;
(ii) he is not waiving his right to file a complaint or charge with the EEOC or participate in any investigation or proceeding conducted by the EEOC;
(iii) he is waiving rights or claims for age discrimination under the ADEA in exchange for the payments and benefits under the Transition Agreement, which are in addition to anything of value to which he otherwise is entitled;
(iv) he has been advised to consult with an attorney of his choice before signing this Supplemental Release, and he has had an opportunity to do so;
(v) he has freely and voluntarily entered into this Supplemental Release without any threat, coercion, or intimidation by any person;
(vi) he has been given the opportunity to take 21 days after his Termination Date to consider whether to sign this Supplemental Release, although he is not required to wait 21 days; and
(vii) he will have seven days after the date he signs this Supplemental Release within which to revoke it, and the Supplemental Release shall not become effective or enforceable as to any party until that revocation period has expired without revocation of the Supplemental Release. Any such revocation shall be in writing and shall be sent to Linda Longo Kazanova, Vice President, Chief Human Resources Officer, at the Companys headquarters at 33 Coffee Lane, Waterbury, VT 05676.
3. The Executive understands that nothing in this Supplemental Release shall be construed to prohibit him from filing a charge with, or participating in any investigation or proceeding conducted by, the Equal Employment Opportunity Commission, National Labor Relations Board, and/or any federal, state or local agency. Notwithstanding the foregoing, the Executive hereby waives any and all rights to recover monetary damages in any charge, complaint, or lawsuit filed by him or by anyone else on his behalf based on events occurring prior to the date of this Supplemental Release.
4. Executive expressly acknowledges that this Supplemental Release is intended to include in its effect, without limitation, all Claims which he does not know or suspect to exist in his favor at the time of execution hereof and that this Supplemental Release contemplates the extinguishment of any such Claim or Claims.
5. Executive agrees that he shall continue to be bound by the provisions of Sections 8, 9, and 10 of the Transition Agreement, which are fully incorporated into this Supplemental Release.
6. Executive represents that he has not heretofore assigned or transferred, or purported to assign or transfer, to any person or entity, any Claim or any portion thereof, or interest therein, and he agrees to indemnify, defend and hold Releasees harmless from and against any and all Claims, based on or arising out of any such assignment or transfer, or purported assignment or transfer of any Claims or any portion thereof or interest therein.
7. Executive acknowledges and agrees that, pursuant to the Transition Agreement, he will have received payment for any and all compensation for services rendered through your Termination Date, including all wages or other compensation and all accrued and unpaid vacation pay. Executive agrees and understands that the Company has paid him for any reimbursable but unpaid business expenses outstanding on the Termination Date.
8. Executive represents and acknowledges that in executing this Supplemental Release he does not rely and has not relied upon any representation or statement not set forth herein made by any of the Releasees or by any of the Releasees agents, representatives, or attorneys with regard to the subject matter, basis, or effect of this Supplemental Release or otherwise.
9. This Supplemental Release shall be binding upon Executive and upon his respective heirs, administrators, representatives, executors, beneficiaries, successors, and assigns, and shall inure to the benefit of Releasees and each of them, and to their heirs, administrators, representatives, executors, successors, and assigns.
10. This Supplemental Release is made and entered into in the State of Vermont and shall in all respects be interpreted, enforced, and governed under the laws of the State of Vermont. The language of all parts of this Supplemental Release shall in all cases be construed as a whole, according to its fair meaning, and not strictly for or against any of the parties. It is agreed that this Agreement shall be construed with the understanding that both parties were responsible for drafting it.
11. Capitalized terms used herein and not defined shall have the meanings ascribed to them in the Transition Agreement.
12. Should any of the provisions of this Supplemental Release be declared or be determined to be illegal or invalid, the validity of the remaining parts, terms, or provisions shall not be affected thereby, and said illegal or invalid part, term, or provision shall be deemed not to be a part of this Supplemental Release.
13. The signed Supplemental Release must be returned to Linda Longo Kazanova, Vice President, Chief Human Resources Officer, at the Companys headquarters at 33 Coffee Lane, Waterbury, VT 05676 on or before July 22, 2013. If Executive does not revoke this Supplemental Release within seven days after signing it, then the Agreement will take effect as a legally binding document on the expiration of the seventh day after signing (the Effective Date).
PLEASE READ CAREFULLY. THIS SUPPLEMENTAL RELEASE INCLUDES A RELEASE OF ALL KNOWN OR UNKNOWN CLAIMS.
Executed at South Burlington (city), Vermont (state) this 17th day of July, 2013.
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/s/ Scott McCreary |
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Scott McCreary |
Received at South Burlington, Vermont this 23rd day of July, 2013.
Green Mountain Coffee Roasters, Inc.
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/s/ Linda Longo Kazanova |
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Printed Name: Linda Longo Kazanova |
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Title: Vice President, Chief Human Resources Officer |
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Exhibit 10.2
CONFIDENTIAL
Green Mountain Coffee Roasters, Inc.
33 Coffee Lane
Waterbury VT 05676
June 19, 2013
Board of Directors
Dear Mr. Stiller:
This letter (this Agreement) will confirm the agreement between you and Green Mountain Coffee Roasters, Inc. (the Company) concerning your engagement to provide advisory services to the Company as Chairman Emeritus.
Advisory Services. You agree to be available to provide advisory services and general advice as requested from time to time by the Chief Executive Officer of the Company. The Company will notify you of the specific services requested from time to time but anticipate such services shall be related to the Companys corporate social responsibility mission and business innovation strategy. You agree to be available to devote as much business time as is necessary or desirable to fully perform services requested by the Company, within reasonable limits, understanding that you have other obligations and are not available on a full-time basis. This Agreement is not a guarantee of work or of any particular number of assignments.
Relationship of Parties. It is expressly agreed that, when providing services to the Company under this Agreement, you will be an independent contractor and that you will not be an employee or agent of the Company or any of its subsidiaries. It is also agreed that you shall have no right to make any commitments on behalf of the Company without the express written consent of the Company. You shall not be entitled to participate in any benefit plans or programs of the Company or any of its subsidiaries. Your services hereunder, if and when provided, however, shall be deemed Employment for purposes of the Companys 2006 Incentive Plan and any awards granted thereunder.
Services for Others. During any period in which you are providing advisory services for the Company, you may choose to also provide advisory or other services for others, provided that any such services or persons are not in competition with the Company and such services do not give rise to a conflict of interest or otherwise interfere with your obligations to the Company under this Agreement.
Compensation. The Company will pay you a fee for services rendered under this Agreement at the rate of fifty thousand U.S. dollars ($50,000) per year, payable monthly in arrears, pro rated for any fraction of a year that you provide services hereunder.
The Company will further reimburse you for any reasonable out of pocket expenses you incur in connection with your services under this Agreement. You agree to submit monthly invoices accounting for your expenses, if any such expenses were incurred. Payment for expenses is subject to invoicing and to such other substantiation and documentation as the Company may require from time to time.
Taxes, Insurance, Benefits and Business Expenses.
As an independent contractor, you shall be solely responsible for your payment of all federal and state income taxes and social security and Medicare taxes and other legally-required payments on sums received from the Company. You will also be solely responsible for your insurance and assume all risk in connection with the adequacy of any and all such insurance that you elect to obtain.
Confidentiality. You agree to comply with the policies and procedures of the Company for protecting confidential information and shall not disclose to any person (other than as required by law) or use for your own benefit or gain, any confidential information obtained by you incident to your association with the Company. This obligation shall continue to apply after the termination of this Agreement regardless of the reason for such termination.
Term and Termination. This Agreement shall commence on the date hereof (the Effective Date) and, unless otherwise agreed by the parties, terminate on the first anniversary of the Effective Date. You may terminate the Agreement at any time, with or without cause, by giving thirty (30) days prior written notice to the Company. Upon termination of this Agreement, the Company shall have no further obligation to you, other than for payment for services rendered by you through the date of termination.
Miscellaneous. This Agreement contains the entire agreement between you and the Company, and replaces all prior agreements, whether written or oral, with respect to the requested services to be provided by you to the Company and all related matters. This Agreement may not be amended and no breach may be waived unless agreed to in writing by you and the Company. You acknowledge that you have not relied on any agreements or representations, express or implied, that are not set forth expressly in this Agreement. This Agreement shall be governed by the laws of the State of Vermont, without giving effect to the principles of conflicts of laws.
If the terms of this Agreement are acceptable to you, please sign, date and return it to me no later than June 19, 2013. At the time you sign and return it, this letter shall take effect as a legally-binding agreement between you and the Company on the basis set forth above. The enclosed copy of this letter, which you should also sign and date, is for your records.
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Sincerely, | ||
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Green Mountain Coffee Roasters, Inc. | ||
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/s/ Brian P. Kelley | |
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Brian P. Kelley | |
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Accepted and agreed: |
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/s/ Robert Stiller |
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Robert Stiller |
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Date June 19, 2013 |
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Exhibit 10.3
Green Mountain Coffee Roasters, Inc.
33 Coffee Lane
Waterbury VT 05676
June 19, 2013
Board of Directors
Dear Mr. Blanford:
This letter (this Agreement) will confirm the agreement between you and Green Mountain Coffee Roasters, Inc. (the Company) concerning your engagement to provide advisory services to the Company as a consultant.
Advisory Services. You agree to be available to provide advisory services and general advice as requested from time to time by the Chief Executive Officer of the Company. The Company will notify you of the specific services requested from time to time but anticipate such services shall be related to the Companys business strategy. You agree to be available to devote as much business time as is necessary or desirable to fully perform services requested by the Company, within reasonable limits, understanding that you have other obligations and are not available on a full-time basis. This Agreement is not a guarantee of work or of any particular number of assignments.
Relationship of Parties. It is expressly agreed that, when providing services to the Company under this Agreement, you will be an independent contractor and that you will not be an employee or agent of the Company or any of its subsidiaries. It is also agreed that you shall have no right to make any commitments on behalf of the Company without the express written consent of the Company. You shall not be entitled to participate in any benefit plans or programs of the Company or any of its subsidiaries. Your services hereunder, if and when provided, however, shall be deemed Employment for purposes of the Companys 2006 Incentive Plan and any awards granted thereunder and for purposes of indemnification and insurance under your indemnification agreement effective as of August 10, 2009.
Services for Others. During any period in which you are providing advisory services for the Company, you may choose to also provide advisory or other services for others, provided that any such services or persons are not in competition with the Company and such services do not give rise to a conflict of interest or otherwise interfere with your obligations to the Company under this Agreement.
Compensation. The Company will pay you a fee for services rendered under this Agreement at the rate of fifty thousand U.S. dollars ($50,000) per calendar year beginning as of January 1, 2013. The Company will further reimburse you for any reasonable out of pocket expenses you incur in connection with your services under this Agreement. You agree to submit monthly invoices accounting for your expenses, if any such expenses were incurred.
Payment for expenses is subject to invoicing and to such other substantiation and documentation as the Company may require from time to time.
Taxes, Insurance, Benefits and Business Expenses. As an independent contractor, you shall be solely responsible for your payment of all federal and state income taxes and social security and Medicare taxes and other legally-required payments on sums received from the Company. You will also be solely responsible for your insurance and assume all risk in connection with the adequacy of any and all such insurance that you elect to obtain.
Confidentiality. You agree to comply with the policies and procedures of the Company for protecting confidential information and shall not disclose to any person (other than as required by law) or use for your own benefit or gain, any confidential information obtained by you incident to your association with the Company. This obligation shall continue to apply after the termination of this Agreement regardless of the reason for such termination.
Term and Termination. This Agreement shall commence on the date hereof (the Effective Date) and, unless otherwise agreed by the parties, terminate on December 31, 2013. The Agreement may be renewed for periods of one (1) year by mutual written agreement. You may terminate the Agreement at any time, with or without cause, by giving thirty (30) days prior written notice to the Company. Upon termination of this Agreement, the Company shall have no further obligation to you, other than for payment for services rendered by you through the date of termination.
Miscellaneous. This Agreement contains the entire agreement between you and the Company, and replaces all prior agreements, whether written or oral, with respect to the requested consultancy services to be provided by you to the Company and all related matters. This Agreement does not replace, supersede or alter the terms in any way of the Employment Agreement between you and Company dated February 1, 2012. This Agreement may not be amended and no breach may be waived unless agreed to in writing by you and the Company. You acknowledge that you have not relied on any agreements or representations, express or implied, that are not set forth expressly in this Agreement. This Agreement shall be governed by the laws of the State of Vermont, without giving effect to the principles of conflicts of laws.
Indemnification and Liability Insurance. The indemnification agreement entered into between you and the Company effective as of August 10, 2009, remains in full force and effect in accordance with its terms. Nothing in this Agreement is intended to release, waive, or otherwise impair any rights to insurance and indemnification pursuant to any agreement, the Companys by-laws or applicable laws.
If the terms of this Agreement are acceptable to you, please sign, date and return it to me no later than June 21, 2013. At the time you sign and return it, this letter shall take effect as a legally-binding agreement between you and the Company on the basis set forth above. The enclosed copy of this letter, which you should also sign and date, is for your records.
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Sincerely, | ||
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Green Mountain Coffee Roasters, Inc. | ||
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By: |
/s/ Brian P. Kelley | |
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Brian P. Kelley | |
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Accepted and agreed: |
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/s/ Lawrence J. Blandford |
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Lawrence J. Blanford |
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Date June 21, 2013 |
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Exhibit 31.1
CERTIFICATION PURSUANT TO
SECURITIES EXCHANGE ACT RULES 13a-14 and 15d-14
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Brian P. Kelley, Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Green Mountain Coffee Roasters, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: August 7, 2013 |
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/s/ Brian P. Kelley |
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Brian P. Kelley |
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President and Chief Executive Officer |
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Exhibit 31.2
CERTIFICATION PURSUANT TO
SECURITIES EXCHANGE ACT RULES 13a-14 and 15d-14
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Frances G. Rathke, Chief Financial Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Green Mountain Coffee Roasters, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: August 7, 2013 |
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/s/ Frances G. Rathke |
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Frances G. Rathke |
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Chief Financial Officer |
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Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Green Mountain Coffee Roasters, Inc. (the Company) on Form 10-Q for the period ending June 29, 2013 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Brian P. Kelley, as the Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
Date: August 7, 2013 | |
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/s/ Brian P. Kelley |
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Brian P. Kelley* |
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President and Chief Executive Officer |
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* A signed original of this written statement required by Section 906 has been provided to Green Mountain Coffee Roasters, Inc. and will be retained by Green Mountain Coffee Roasters, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
The foregoing certification is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code) and is not being filed as part of the Form 10-Q or as a separate disclosure document.
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Green Mountain Coffee Roasters, Inc. (the Company) on Form 10-Q for the period ending June 29, 2013 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Frances G. Rathke, as the Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
Date: August 7, 2013
/s/ Frances G. Rathke |
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Frances G. Rathke* |
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Chief Financial Officer |
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* A signed original of this written statement required by Section 906 has been provided to Green Mountain Coffee Roasters, Inc. and will be retained by Green Mountain Coffee Roasters, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
The foregoing certification is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code) and is not being filed as part of the Form 10-Q or as a separate disclosure document.
Derivative Financial Instruments
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Derivative Financial Instruments | 10. Derivative Financial Instruments
Cash Flow Hedges
The Company is exposed to certain risks relating to ongoing business operations. The primary risks that are mitigated by financial instruments are interest rate risk and commodity price risk. The Company uses interest rate swaps to mitigate interest rate risk associated with the Company’s variable-rate borrowings and enters into coffee futures contracts to hedge future coffee purchase commitments of green coffee with the objective of minimizing cost risk due to market fluctuations.
The Company designates these contracts as cash flow hedges and measures the effectiveness of these derivative instruments at each balance sheet date. The changes in the fair value of these instruments are classified in accumulated other comprehensive income (loss). The gain or loss on these instruments is reclassified from other comprehensive income (“OCI”) into earnings in the same period or periods during which the hedged transaction affects earnings. If it is determined that a derivative is not highly effective, the gain or loss is reclassified into earnings.
Fair Value Hedges
The Company enters into foreign currency forward contracts to hedge certain recognized liabilities in currencies other than the Company’s functional currency. The Company designates these contracts as fair value hedges and measures the effectiveness of these derivative instruments at each balance sheet date. The changes in the fair value of these instruments along with the changes in the fair value of the hedged liabilities are recognized in net gains or losses on foreign currency on the 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 29, 2013, the Company has approximately three years remaining on a CDN $120.0 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 29, 2013 was $0.4 million and $1.3 million, respectively. Additional interest expense pursuant to the cross currency swap agreement for the thirteen and thirty-nine weeks ended June 23, 2012 was $0.4 million and $1.4 million, respectively.
The Company occasionally enters into foreign currency forward contracts and coffee futures contracts which are not designated as hedging instruments for accounting purposes, in addition to the foreign currency forward contracts and coffee futures contracts noted above. Contracts that are not designated as hedging instruments are recorded at fair value with the changes in fair value recognized in the 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.
The following table summarizes the fair value of the Company’s derivatives included on the Unaudited Consolidated Balance Sheets (in thousands):
The following table summarizes the amount of gain (loss), gross of tax, arising during the period on financial instruments that qualify for hedge accounting included in OCI (in thousands):
The following table summarizes the amount of gains (losses), gross of tax, reclassified from OCI to income (in thousands):
The Company expects to reclassify $1.9 million of net losses, net of tax, from OCI to earnings for coffee derivatives within the next twelve months.
The amount of gain (loss), gross of tax, on fair value hedges and related hedged items for the thirteen weeks ended June 29, 2013 and June 23, 2012 is as follows (in thousands):
The amount of gain (loss), gross of tax, on fair value hedges and related hedged items for the thirty-nine weeks ended June 29, 2013 and June 23, 2012 is as follows (in thousands):
Net gains (losses) on financial instruments not designated as hedges for accounting purposes recorded in gain (loss) on financial instruments, net, is as follows (in thousands):
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Income Taxes (Details)
In Millions, unless otherwise specified |
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Income Taxes | ||||
Capital loss carryforward | $ 17.7 | |||
Net operating loss carryforward | 11.5 | |||
Unrecognized tax benefits | 22.1 | 24.0 | ||
Unrecognized tax benefits that would impact effective tax rate | 18.5 | |||
Indemnified amount of unrecognized tax benefits | 14.1 | |||
Maximum amount of unrecognized tax benefit indemnification | 37.9 | |||
Accrued interest and penalties | 1.8 | 0.6 | ||
Unrecognized tax benefits amount released | 2.2 | |||
Unrecognized tax benefits expected to be released during the remainder of fiscal 2013 due to expiration of the statute of limitations | $ 1.5 |
Consolidated Statements of Operations (USD $)
In Thousands, except Share data, unless otherwise specified |
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Consolidated Statements of Operations | ||||
Net sales | $ 967,072 | $ 869,194 | $ 3,310,923 | $ 2,912,462 |
Cost of sales | 559,454 | 565,883 | 2,068,996 | 1,959,509 |
Gross profit | 407,618 | 303,311 | 1,241,927 | 952,953 |
Selling and operating expenses | 136,742 | 117,982 | 433,368 | 370,445 |
General and administrative expenses | 77,532 | 55,601 | 220,670 | 157,349 |
Operating income | 193,344 | 129,728 | 587,889 | 425,159 |
Other income, net | 237 | 229 | 652 | 1,589 |
Gain (loss) on financial instruments, net | 4,419 | 3,032 | 8,994 | (214) |
(Loss) gain on foreign currency, net | (10,391) | (5,068) | (19,185) | 1,231 |
Gain on sale of subsidiary | 26,311 | |||
Interest expense | (3,937) | (6,157) | (13,481) | (18,662) |
Income before income taxes | 183,672 | 121,764 | 564,869 | 435,414 |
Income tax expense | (67,226) | (48,244) | (207,907) | (163,949) |
Net income | 116,446 | 73,520 | 356,962 | 271,465 |
Net income attributable to noncontrolling interests | 174 | 224 | 686 | 724 |
Net income attributable to GMCR | $ 116,272 | $ 73,296 | $ 356,276 | $ 270,741 |
Basic income per share: | ||||
Basic weighted average shares outstanding (in shares) | 149,825,581 | 155,459,690 | 149,307,144 | 155,071,117 |
Net income per common share - basic (in dollars per share) | $ 0.78 | $ 0.47 | $ 2.39 | $ 1.75 |
Diluted income per share: | ||||
Diluted weighted average shares outstanding (in shares) | 152,869,392 | 159,299,578 | 152,647,767 | 159,364,440 |
Net income per common share - diluted (in dollars per share) | $ 0.76 | $ 0.46 | $ 2.33 | $ 1.70 |
Divestiture
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Divestiture | 3. Divestiture
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 Canada segment.
Filterfresh revenues and net income included in the Company’s Unaudited Consolidated Statements of Operations were as follows (dollars in thousands, except per share data):
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 Unaudited Consolidated Statements of Operations. The Company’s sales to Filterfresh for the period September 25, 2011 through October 3, 2011 (date of sale) that were eliminated in consolidation were $0.6 million.
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Earnings Per Share | 17. Earnings Per Share
The following table illustrates the reconciliation of the numerator and denominator of basic and diluted earnings per share computations (dollars in thousands, except per share data):
For the thirteen weeks ended June 29, 2013 and June 23, 2012, shares related to equity-based compensation of 607,000 and 1,198,000, respectively, were excluded from the calculation of diluted earnings per share because they were antidilutive.
For the thirty-nine weeks ended June 29, 2013 and June 23, 2012, shares related to equity-based compensation of 954,000 and 557,000, respectively, were excluded from the calculation of diluted earnings per share because they were antidilutive.
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Fair Value Measurements
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Fair Value Measurements | 11. 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 Financial Accounting Standards Board 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 identical or 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 29, 2013 for the Company’s financial assets (liabilities) (in thousands):
The following table summarizes the fair values and the levels used in fair value measurements as of September 29, 2012 for the Company’s financial assets (liabilities) (in thousands):
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 29, 2013, 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 $238.1 million and $473.7 million as of June 29, 2013 and September 29, 2012, 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.
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Noncontrolling Interests (Details) (USD $)
In Thousands, unless otherwise specified |
3 Months Ended | 9 Months Ended | ||
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Jun. 29, 2013
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Jun. 23, 2012
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Jun. 29, 2013
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Jun. 23, 2012
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Changes in the liability and temporary equity attributable to redeemable NCIs | ||||
Net income | $ 174 | $ 224 | $ 686 | $ 724 |
Liability attributable to mandatorily redeemable noncontrolling interests
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Changes in the liability and temporary equity attributable to redeemable NCIs | ||||
Balance at the beginning of the period | 4,928 | |||
Net income | 361 | |||
Adjustment to redemption value | 407 | |||
Cash distributions | (388) | |||
Other comprehensive loss | (349) | |||
Balance at the end of the period | 4,959 | 4,959 | ||
Equity attributable to redeemable noncontrolling interests
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Changes in the liability and temporary equity attributable to redeemable NCIs | ||||
Balance at the beginning of the period | 9,904 | |||
Net income | 325 | |||
Adjustment to redemption value | 1,312 | |||
Cash distributions | (618) | |||
Other comprehensive loss | (685) | |||
Balance at the end of the period | $ 10,238 | $ 10,238 |
Compensation Plans (Details 2) (Deferred cash awards ("DCAs"))
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9 Months Ended |
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Jun. 29, 2013
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Minimum
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Deferred cash awards ("DCAs") | |
Vesting period | 3 years |
Maximum
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Deferred cash awards ("DCAs") | |
Vesting period | 4 years |
Segment Reporting (Details) (USD $)
In Thousands, unless otherwise specified |
0 Months Ended | 3 Months Ended | 9 Months Ended | 3 Months Ended | 9 Months Ended | 3 Months Ended | 9 Months Ended | 3 Months Ended | 9 Months Ended | 3 Months Ended | 9 Months Ended | 3 Months Ended | 9 Months Ended | |||||||||
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May 07, 2013
item
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Jun. 29, 2013
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Jun. 23, 2012
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Jun. 29, 2013
item
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Jun. 23, 2012
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Jun. 29, 2013
Domestic
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Jun. 23, 2012
Domestic
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Jun. 29, 2013
Domestic
|
Jun. 23, 2012
Domestic
|
May 08, 2013
Domestic
item
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Jun. 29, 2013
Canada
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Jun. 23, 2012
Canada
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Jun. 29, 2013
Canada
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Jun. 23, 2012
Canada
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Jun. 29, 2013
Corporate Unallocated
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Jun. 23, 2012
Corporate Unallocated
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Jun. 29, 2013
Corporate Unallocated
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Jun. 23, 2012
Corporate Unallocated
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Jun. 23, 2012
Corporate Unallocated
Revision to correctly reflect depreciation expense
Amount of revision
IST
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Jun. 23, 2012
Corporate Unallocated
Revision to correctly reflect depreciation expense
Amount of revision
IST
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Jun. 23, 2012
Operating segments
Revision to correctly reflect depreciation expense
Amount of revision
IST
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Jun. 23, 2012
Operating segments
Revision to correctly reflect depreciation expense
Amount of revision
IST
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Segment Reporting | ||||||||||||||||||||||
Historical number of business segments | 3 | |||||||||||||||||||||
Number of operating segments | 2 | |||||||||||||||||||||
Number of reportable segments | 2 | |||||||||||||||||||||
Number of channels in which products are distributed | 2 | |||||||||||||||||||||
Segment Reporting | ||||||||||||||||||||||
Number of domestic segments into which SCBU and KBU were combined | 1 | |||||||||||||||||||||
Net sales | $ 967,072 | $ 869,194 | $ 3,310,923 | $ 2,912,462 | $ 822,593 | $ 719,771 | $ 2,820,123 | $ 2,437,935 | $ 144,479 | $ 149,423 | $ 490,800 | $ 474,527 | ||||||||||
Operating income (loss) | 193,344 | 129,728 | 587,889 | 425,159 | 213,076 | 125,368 | 644,024 | 423,228 | 23,658 | 21,933 | 69,855 | 60,327 | (43,390) | (17,573) | (125,990) | (58,396) | ||||||
Stock compensation | 6,131 | 4,420 | 21,203 | 13,629 | 2,615 | 2,011 | 7,808 | 6,147 | 515 | 379 | 1,870 | 1,504 | 3,001 | 2,030 | 11,525 | 5,978 | ||||||
Depreciation and amortization | $ 61,209 | $ 44,874 | $ 171,968 | $ 123,717 | $ 44,083 | $ 29,452 | $ 121,675 | $ 78,963 | $ 16,501 | $ 15,421 | $ 48,938 | $ 44,751 | $ 625 | $ 1 | $ 1,355 | $ 3 | $ (5,300) | $ (14,400) | $ 5,300 | $ 14,400 |
Inventories (Tables)
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9 Months Ended | ||||||||||||||||||||||||||||||||||||||||
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Jun. 29, 2013
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Inventories | |||||||||||||||||||||||||||||||||||||||||
Schedule of inventories | Inventories consisted of the following (in thousands) as of:
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Schedule of minimum future inventory purchase commitments | As of June 29, 2013, minimum future inventory purchase commitments were as follows (in thousands):
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Segment Reporting (Tables)
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9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jun. 29, 2013
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Segment Reporting | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Financial data for segment disclosures |
(1) Reported segment depreciation and amortization has been revised to reflect depreciation expense for Information Systems Technology (“IST”) equipment that was allocated to operating segments in each segment’s income before taxes. In the Company’s Quarterly Report on Form 10-Q for the thirteen weeks ended June 23, 2012, filed on August 1, 2012, IST equipment depreciation expense was appropriately allocated, recorded and reported on a consolidated basis and in each operating segment’s income before taxes; however, on the depreciation and amortization line, IST equipment depreciation of $5.3 million that should have been reported under the operating segments was reported in Corporate. The historical issues with the depreciation and amortization lines did not impact the segment reporting for any other line items, including operating income. Management believes the revision to operating segments’ depreciation and amortization was not material.
(1) Reported segment depreciation and amortization has been revised to reflect depreciation expense for IST equipment that was allocated to operating segments in each segment’s income before taxes. In the Company’s Quarterly Report on Form 10-Q for the thirteen weeks ended June 23, 2012, filed on August 1, 2012, IST equipment depreciation expense was appropriately allocated, recorded and reported on a consolidated basis and in each operating segment’s income before taxes; however, on the depreciation and amortization line, IST equipment depreciation of $14.4 million for the thirty-nine weeks ended June 23, 2012 that should have been reported under the operating segments was reported in Corporate. The historical issues with the depreciation and amortization lines did not impact the segment reporting for any other line items, including operating income. Management believes the revision to operating segments’ depreciation and amortization was not material. |
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Schedule of reconciliation of the total segment operating income to consolidated income before income taxes | The following table reconciles the total segment operating income to consolidated income before income taxes, as presented in the Unaudited Consolidated Statements of Operations (in thousands):
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Goodwill and Intangible Assets (Details 4) (USD $)
In Thousands, unless otherwise specified |
Jun. 29, 2013
|
---|---|
Estimated aggregate amortization expense for the remainder of fiscal 2013, for each of the next five years and thereafter | |
Remainder of 2013 | $ 11,083 |
2014 | 43,731 |
2015 | 42,182 |
2016 | 41,476 |
2017 | 40,080 |
2018 | 40,080 |
Thereafter | $ 124,658 |
Stockholders' Equity (Tables)
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9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jun. 29, 2013
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Stockholders' Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Components of stock repurchase program |
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Components of accumulated other comprehensive income (loss), net of tax | 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 29, 2013:
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Inventories (Details) (USD $)
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9 Months Ended | ||||
---|---|---|---|---|---|
Jun. 29, 2013
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Sep. 29, 2012
|
Jun. 29, 2013
Green coffee
|
Jun. 29, 2013
Brewer inventory
|
Jun. 29, 2013
Production raw materials
|
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Inventories | |||||
Raw materials and supplies | $ 177,843,000 | $ 229,927,000 | |||
Finished goods | 408,420,000 | 538,510,000 | |||
Inventories | 586,263,000 | 768,437,000 | |||
Purchase commitments | |||||
Amount of purchase commitment | $ 270,400,000 | $ 305,000,000 | $ 508,100,000 | ||
Percentage of purchase commitment that has a fixed price | 86.00% | ||||
Average C price of coffee per pound used to calculate variable portion of purchase commitment (in dollars per pound) | 1.28 |
Derivative Financial Instruments (Details)
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3 Months Ended | 9 Months Ended | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Jun. 29, 2013
USD ($)
|
Sep. 29, 2012
USD ($)
|
Jun. 29, 2013
Designated as hedges
USD ($)
|
Sep. 29, 2012
Designated as hedges
USD ($)
|
Jun. 29, 2013
Designated as hedges
Interest rate swaps
USD ($)
|
Sep. 29, 2012
Designated as hedges
Interest rate swaps
USD ($)
|
Jun. 29, 2013
Designated as hedges
Coffee futures
USD ($)
|
Sep. 29, 2012
Designated as hedges
Coffee futures
USD ($)
|
Jun. 29, 2013
Not designated as hedges
USD ($)
|
Sep. 29, 2012
Not designated as hedges
USD ($)
|
Jun. 29, 2013
Not designated as hedges
Cross currency swap
USD ($)
|
Jun. 23, 2012
Not designated as hedges
Cross currency swap
USD ($)
|
Jun. 29, 2013
Not designated as hedges
Cross currency swap
USD ($)
|
Jun. 23, 2012
Not designated as hedges
Cross currency swap
USD ($)
|
Jun. 29, 2013
Not designated as hedges
Cross currency swap
CAD
|
Sep. 29, 2012
Not designated as hedges
Cross currency swap
USD ($)
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Fair value of derivatives | ||||||||||||||||
Period of derivative | 3 years | |||||||||||||||
Notional amount | 120,000,000 | |||||||||||||||
Variable interest rate basis payable | Three month Canadian Bankers Acceptance rate | |||||||||||||||
Variable interest rate basis receivable | Three month U.S. Libor rate | |||||||||||||||
Additional interest expense | 400,000 | 400,000 | 1,300,000 | 1,400,000 | ||||||||||||
Fair value of derivative liabilities | (6,329,000) | (9,019,000) | (853,000) | (342,000) | (7,242,000) | |||||||||||
Fair value of derivative assets | 1,752,000 | 1,752,000 | ||||||||||||||
Total fair value of derivatives | $ (5,430,000) | $ (16,603,000) | $ (7,182,000) | $ (9,361,000) | $ 1,752,000 | $ (7,242,000) |
Noncontrolling Interests (Tables)
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9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jun. 29, 2013
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Noncontrolling Interests | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of changes in the liability and temporary equity attributable to redeemable NCIs | The changes in the liability and temporary equity attributable to redeemable NCIs for the thirty-nine weeks ended June 29, 2013 are as follows (in thousands):
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Goodwill and Intangible Assets (Details) (USD $)
In Thousands, unless otherwise specified |
9 Months Ended | 9 Months Ended | |||
---|---|---|---|---|---|
Jun. 29, 2013
|
Jun. 29, 2013
Domestic
|
May 08, 2013
Domestic
item
|
Sep. 29, 2012
Domestic
|
Jun. 29, 2013
Canada
|
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Changes in the carrying amount of goodwill | |||||
Balance at the beginning of the period | $ 808,076 | $ 369,353 | $ 369,353 | $ 438,723 | |
Foreign currency effect | (28,437) | (28,437) | |||
Balance at the end of the period | $ 779,639 | $ 369,353 | $ 369,353 | $ 410,286 | |
Number of domestic segments into which SCBU and KBU were combined | 1 |
Divestiture (Tables)
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9 Months Ended | ||||||||||||||||||||||||||||||||||||||||
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Jun. 29, 2013
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Divestiture | |||||||||||||||||||||||||||||||||||||||||
Revenues and net income of disposal group included in consolidated statement of operations | Filterfresh revenues and net income included in the Company’s Unaudited Consolidated Statements of Operations were as follows (dollars in thousands, except per share data):
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Basis of Presentation
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9 Months Ended |
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Jun. 29, 2013
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Basis of Presentation | |
Basis of Presentation | 1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information, the instructions to Form 10-Q, and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete consolidated financial statements.
In the opinion of management, all adjustments considered necessary for a fair statement of the interim financial data have been included. Results from operations for the thirteen and thirty-nine week periods ended June 29, 2013 are not necessarily indicative of the results that may be expected for the fiscal year ending September 28, 2013.
The September 29, 2012 balance sheet data was derived from audited financial statements but does not include all disclosures required by GAAP. For further information, refer to the consolidated financial statements and the footnotes included in the Annual Report on Form 10-K for Green Mountain Coffee Roasters, Inc. for the fiscal year ended September 29, 2012. Throughout this presentation, we refer to the consolidated company as the “Company” and, unless otherwise noted, the information provided is on a consolidated basis.
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Segment Reporting
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9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jun. 29, 2013
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Segment Reporting | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Segment Reporting | 4. Segment Reporting
The Company has historically managed its operations through three business segments: the Specialty Coffee business unit (“SCBU”), the Keurig business unit (“KBU”) and the Canadian business unit. Effective as of and as initially disclosed on May 8, 2013, the Company’s Board of Directors authorized and approved a reorganization which consolidated U.S. operations to bring greater organizational efficiency and coordination across the Company. Due to this combination, the results of U.S. operations, formerly reported in the SCBU and KBU segments, are reported in one segment (“Domestic”) and the results of Canadian operations are reported in the “Canada” segment. The Company’s Chief Executive Officer (“CEO”) serves as the Company’s chief operating decision maker (“CODM”) and there are two operating and reportable segments, Domestic and Canada.
Effective for the quarter ended June 29, 2013, as a result of the consolidation of U.S. operations, the Company has recast all historical segment results in order to provide data that is on a basis consistent with the Company’s new structure, remove total assets from the Company’s segment disclosures as only consolidated asset information is provided to and used by the CODM for use in decision making (in connection with the reorganization, segment asset information is neither provided to nor used by the CODM), and reflect all corporate social responsibility expenses in Corporate as the Company no longer allocates those expenses to its operating segments.
The Company distributes its products in two channels: at-home (“AH”) and away-from-home (“AFH”).
The Domestic segment sells single cup brewers, accessories, and sources, produces and sells coffee, hot cocoa, teas and other beverages in K-Cup® and Vue® packs (“single serve 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. Substantially all of the Domestic segment’s distribution to major retailers is processed by fulfillment entities which receive and fulfill sales orders and invoice certain retailers primarily in the AH channel. The Domestic segment also earns royalty income from K-Cup® packs sold by a third party licensed roaster.
The Canada segment sources, produces and sells coffees and teas and other beverages in a variety of packaging formats, including K-Cup® packs, and coffee in more traditional packaging such as bags, cans and fractional packs, and under a variety of brands. The varieties are sold primarily to supermarkets, club stores and, through office coffee services to offices, convenience stores and restaurants throughout Canada. In addition, the Canada segment sells the Keurig® K-Cup® Single Cup brewers, accessories and coffee, tea, and other beverages in K-Cup® packs to retailers, department stores and mass merchandisers in Canada for the AH channels; manufactures certain brewing equipment; and is responsible for all of the Company’s coffee brand sales in the grocery channel in Canada. The Canada segment included Filterfresh through October 3, 2011, the date of sale (see Note 3, Divestitures).
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 social responsibility 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. The Company does not disclose assets or property additions by segment as only consolidated asset information is provided to the CODM for use in decision making.
Effective for the first quarter of fiscal 2013, the Company changed its measure for reporting segment profitability and for evaluating segment performance and the allocation of Company resources from income before taxes to operating income (loss). Prior to the first quarter of fiscal 2013, the Company disclosed each operating and reporting segment’s income before taxes to report segment profitability. Segment disclosures for prior periods have been recast to reflect operating income by segment in place of income before taxes. The CODM measures segment performance based upon operating income which excludes interest expense and interest expense is not provided to the CODM by segment. Accordingly, interest expense by segment is no longer presented.
Sales between operating segments are transacted at cost. As a result, intersegment sales have no impact on operating income and effective for the first quarter of fiscal 2013, the Company no longer discloses intersegment sales. Net sales for the thirteen and thirty-nine weeks ended June 29, 2013 and comparative historical periods include only net sales to external customers.
The following tables summarize selected financial data for segment disclosures for the thirteen and thirty-nine weeks ended June 29, 2013 and June 23, 2012:
(1) Reported segment depreciation and amortization has been revised to reflect depreciation expense for Information Systems Technology (“IST”) equipment that was allocated to operating segments in each segment’s income before taxes. In the Company’s Quarterly Report on Form 10-Q for the thirteen weeks ended June 23, 2012, filed on August 1, 2012, IST equipment depreciation expense was appropriately allocated, recorded and reported on a consolidated basis and in each operating segment’s income before taxes; however, on the depreciation and amortization line, IST equipment depreciation of $5.3 million that should have been reported under the operating segments was reported in Corporate. The historical issues with the depreciation and amortization lines did not impact the segment reporting for any other line items, including operating income. Management believes the revision to operating segments’ depreciation and amortization was not material.
(1) Reported segment depreciation and amortization has been revised to reflect depreciation expense for IST equipment that was allocated to operating segments in each segment’s income before taxes. In the Company’s Quarterly Report on Form 10-Q for the thirteen weeks ended June 23, 2012, filed on August 1, 2012, IST equipment depreciation expense was appropriately allocated, recorded and reported on a consolidated basis and in each operating segment’s income before taxes; however, on the depreciation and amortization line, IST equipment depreciation of $14.4 million for the thirty-nine weeks ended June 23, 2012 that should have been reported under the operating segments was reported in Corporate. The historical issues with the depreciation and amortization lines did not impact the segment reporting for any other line items, including operating income. Management believes the revision to operating segments’ depreciation and amortization was not material.
The following table reconciles the total segment operating income to consolidated income before income taxes, as presented in the Unaudited Consolidated Statements of Operations (in thousands):
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Recent Accounting Pronouncements
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9 Months Ended |
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Jun. 29, 2013
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Recent Accounting Pronouncements | |
Recent Accounting Pronouncements | 2. Recent Accounting Pronouncements
In March 2013, the Financial Accounting Standards Board (the “FASB”) issued an Accounting Standards Update (“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 are effective prospectively for reporting periods beginning after December 15, 2013, and early adoption is permitted. The adoption of ASU 2013-05 is not expected to have an 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 are effective for reporting periods beginning after December 15, 2013, with early adoption permitted. 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.
In February 2013, the FASB issued ASU No. 2013-02, “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Comprehensive Income” (“ASU 2013-02”). ASU 2013-02 requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under GAAP to be reclassified in its entirety to net income. For significant items not reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures that provide additional detail about those amounts. The amendments in this ASU are effective for annual reporting periods, and interim periods within those annual reporting periods, beginning after December 15, 2012, which for the Company will be the first quarter of fiscal 2014. The adoption of ASU 2013-02 is not expected to have an impact on the Company’s net income, financial position or cash flows.
In December 2011, the FASB issued ASU No. 2011-11, “Disclosures about Offsetting Assets and Liabilities,” (“ASU 2011-11”) that provides amendments for disclosures about offsetting assets and liabilities. The amendments require an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. Entities are required to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement.
On January 31, 2013, the FASB issued ASU No. 2013-01, “Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities,” which clarified that the scope of the disclosures is limited to include derivatives, sale and repurchase agreements and reverse sale and repurchase agreements, and securities borrowing and securities lending arrangements. The amendments are effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. Disclosures required by the amendments should be provided retrospectively for all comparative periods presented. For the Company, the amendments are effective for the fiscal year ending September 27, 2014 (fiscal year 2014). The Company has not adopted the amendments and is currently evaluating the impact these amendments may have on its disclosures.
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Inventories (Details 2) (Inventory, USD $)
In Thousands, unless otherwise specified |
Jun. 29, 2013
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Inventory
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Purchase commitments | |
Remainder of 2013 | $ 484,313 |
2014 | 227,529 |
2015 | 106,311 |
2016 | 109,635 |
2017 | 84,465 |
Thereafter | 79,577 |
Minimum future inventory purchase commitments | $ 1,091,830 |
Fixed Assets (Tables)
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Jun. 29, 2013
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Schedule of fixed assets | Fixed assets consisted of the following (in thousands) as of:
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Derivative Financial Instruments (Tables)
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Jun. 29, 2013
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Derivative Financial Instruments | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Summary of fair value of derivatives included on Consolidated Balance Sheets | The following table summarizes the fair value of the Company’s derivatives included on the Unaudited Consolidated Balance Sheets (in thousands):
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Summary of gain (loss), gross of tax, arising during the period on financial instruments that qualify for hedge accounting included in OCI | The following table summarizes the amount of gain (loss), gross of tax, arising during the period on financial instruments that qualify for hedge accounting included in OCI (in thousands):
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Summary of gains (losses), gross of tax, reclassified from OCI to income | The following table summarizes the amount of gains (losses), gross of tax, reclassified from OCI to income (in thousands):
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Summarizes the amount of gain (loss), gross of tax, on fair value hedges and related hedged items | The amount of gain (loss), gross of tax, on fair value hedges and related hedged items for the thirteen weeks ended June 29, 2013 and June 23, 2012 is as follows (in thousands):
The amount of gain (loss), gross of tax, on fair value hedges and related hedged items for the thirty-nine weeks ended June 29, 2013 and June 23, 2012 is as follows (in thousands):
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Schedule of net gains (losses) on financial instruments not designated as hedges for accounting purposes recorded in gain (loss) on financial instruments | Net gains (losses) on financial instruments not designated as hedges for accounting purposes recorded in gain (loss) on financial instruments, net, is as follows (in thousands):
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Divestiture (Details) (USD $)
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9 Months Ended | 0 Months Ended | 1 Months Ended | 3 Months Ended |
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Jun. 23, 2012
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Oct. 03, 2011
Filterfresh
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Oct. 31, 2011
Filterfresh
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Dec. 24, 2011
Filterfresh
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Acquisitions and divestitures | ||||
Cash received on sale of subsidiary | $ 149,500,000 | |||
Amount of cash transferred as part of sale of subsidiary | 4,400,000 | |||
Payment made for settlement of contingency | 7,400,000 | |||
Net cash inflow related to sale of subsidiary | 137,700,000 | |||
Gain on sale of subsidiary | 26,311,000 | 26,300,000 | ||
Revenues and net income of disposal group included in consolidated statement of operations | ||||
Net sales | 2,286,000 | |||
Net income | 229,000 | |||
Less income attributable to noncontrolling interests | 20,000 | |||
Net income attributable to GMCR | 209,000 | |||
Diluted net income per share (in dollars per share) | $ 0.00 | |||
Intercompany sales eliminated and not reflected in consolidated statement of operations | $ 600,000 |
Stockholders' Equity (Details 2) (USD $)
In Thousands, unless otherwise specified |
9 Months Ended |
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Jun. 29, 2013
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Accumulated Other Comprehensive Income (Loss) | |
Balance at the beginning of the period | $ 10,200 |
Other comprehensive income (loss), net of tax | (40,920) |
Balance at the end of the period | (30,720) |
Cash Flow Hedges
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Accumulated Other Comprehensive Income (Loss) | |
Balance at the beginning of the period | (5,792) |
Other comprehensive income (loss), net of tax | 90 |
Balance at the end of the period | (5,702) |
Translation
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Accumulated Other Comprehensive Income (Loss) | |
Balance at the beginning of the period | 15,992 |
Other comprehensive income (loss), net of tax | (41,010) |
Balance at the end of the period | $ (25,018) |