FORM 10-Q
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the thirteen weeks ended June 28, 2014
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from to
Keurig Green Mountain, Inc.
Commission file number 1-12340
Delaware |
|
03-0339228 |
(State or other jurisdiction of |
|
(I.R.S. Employer Identification No.) |
33 Coffee Lane, Waterbury, Vermont 05676
(Address of principal executive offices) (zip code)
(802) 244-5621
(Registrants telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report.)
Indicate by check mark whether the registrant has (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES x NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer x |
|
Accelerated filer o |
|
|
|
Non-accelerated filer o |
|
Smaller Reporting Company o |
Indicate by check mark whether the Registrant is a shell company (as defined in rule 12b-2 of the Exchange Act) YES o NO x
As of August 1, 2014, 162,422,470 shares of common stock of the registrant were outstanding.
KEURIG GREEN MOUNTAIN, INC.
Form 10-Q
For the Thirteen Weeks Ended June 28, 2014
|
Page | |
1 | ||
1 | ||
|
2 | |
|
3 | |
|
4 | |
|
Unaudited Consolidated Statement of Changes in Stockholders Equity |
6 |
|
7 | |
|
8 | |
Managements Discussion and Analysis of Financial Condition and Results of Operations |
28 | |
44 | ||
46 | ||
|
| |
47 | ||
47 | ||
47 | ||
54 | ||
54 | ||
55 |
KEURIG GREEN MOUNTAIN, INC.
Unaudited Consolidated Balance Sheets
(Dollars in thousands, except per share data)
|
|
June 28, |
|
September 28, |
| ||
Assets |
|
|
|
|
| ||
Current assets: |
|
|
|
|
| ||
Cash and cash equivalents |
|
$ |
1,203,711 |
|
$ |
260,092 |
|
Restricted cash and cash equivalents |
|
470 |
|
560 |
| ||
Receivables, less uncollectible accounts and return allowances of $34,492 and $33,640 at June 28, 2014 and September 28, 2013, respectively |
|
382,382 |
|
467,976 |
| ||
Inventories |
|
639,019 |
|
676,089 |
| ||
Income taxes receivable |
|
1,725 |
|
11,747 |
| ||
Other current assets |
|
63,680 |
|
46,891 |
| ||
Deferred income taxes, net |
|
49,263 |
|
58,137 |
| ||
Total current assets |
|
2,340,250 |
|
1,521,492 |
| ||
|
|
|
|
|
| ||
Fixed assets, net |
|
1,105,648 |
|
985,563 |
| ||
Intangibles, net |
|
389,419 |
|
435,216 |
| ||
Goodwill |
|
773,706 |
|
788,184 |
| ||
Deferred income taxes, net |
|
147 |
|
149 |
| ||
Other long-term assets |
|
34,494 |
|
30,944 |
| ||
|
|
|
|
|
| ||
Total assets |
|
$ |
4,643,664 |
|
$ |
3,761,548 |
|
|
|
|
|
|
| ||
Liabilities and Stockholders Equity |
|
|
|
|
| ||
Current liabilities: |
|
|
|
|
| ||
Current portion of long-term debt |
|
$ |
17,675 |
|
$ |
12,929 |
|
Current portion of capital lease and financing obligations |
|
2,021 |
|
1,760 |
| ||
Accounts payable |
|
370,052 |
|
312,170 |
| ||
Dividends payable |
|
40,653 |
|
|
| ||
Accrued expenses |
|
239,845 |
|
242,427 |
| ||
Deferred income taxes, net |
|
113 |
|
233 |
| ||
Other current liabilities |
|
12,917 |
|
27,544 |
| ||
Total current liabilities |
|
683,276 |
|
597,063 |
| ||
|
|
|
|
|
| ||
Long-term debt, less current portion |
|
145,986 |
|
160,221 |
| ||
Capital lease and financing obligations, less current portion |
|
108,177 |
|
76,061 |
| ||
Deferred income taxes, net |
|
248,038 |
|
252,867 |
| ||
Other long-term liabilities |
|
23,402 |
|
28,721 |
| ||
|
|
|
|
|
| ||
Commitments and contingencies |
|
|
|
|
| ||
|
|
|
|
|
| ||
Redeemable noncontrolling interests |
|
12,420 |
|
11,045 |
| ||
|
|
|
|
|
| ||
Stockholders equity: |
|
|
|
|
| ||
Preferred stock, $0.10 par value: Authorized - 1,000,000 shares; No shares issued or outstanding |
|
|
|
|
| ||
Common stock, $0.10 par value: Authorized - 500,000,000 shares; Issued and outstanding - 162,612,596 and 150,265,809 shares at June 28, 2014 and September 28, 2013, respectively |
|
16,261 |
|
15,026 |
| ||
Additional paid-in capital |
|
1,846,409 |
|
1,387,322 |
| ||
Retained earnings |
|
1,587,707 |
|
1,252,407 |
| ||
Accumulated other comprehensive loss |
|
(28,012 |
) |
(19,185 |
) | ||
Total stockholders equity |
|
3,422,365 |
|
2,635,570 |
| ||
|
|
|
|
|
| ||
Total liabilities and stockholders equity |
|
$ |
4,643,664 |
|
$ |
3,761,548 |
|
The accompanying Notes to the Unaudited Consolidated Financial Statements are an integral part of these interim financial statements.
KEURIG GREEN MOUNTAIN, INC.
Unaudited Consolidated Statements of Operations
(Dollars in thousands, except per share data)
|
|
Thirteen weeks ended |
|
Thirty-nine weeks ended |
| ||||||||
|
|
June 28, |
|
June 29, |
|
June 28, |
|
June 29, |
| ||||
Net sales |
|
$ |
1,022,371 |
|
$ |
967,072 |
|
$ |
3,512,113 |
|
$ |
3,310,923 |
|
Cost of sales |
|
577,779 |
|
559,454 |
|
2,146,042 |
|
2,068,996 |
| ||||
Gross profit |
|
444,592 |
|
407,618 |
|
1,366,071 |
|
1,241,927 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Selling and operating expenses |
|
127,855 |
|
136,742 |
|
421,075 |
|
433,368 |
| ||||
General and administrative expenses |
|
85,390 |
|
77,532 |
|
226,537 |
|
220,670 |
| ||||
Operating income |
|
231,347 |
|
193,344 |
|
718,459 |
|
587,889 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Other income, net |
|
253 |
|
237 |
|
1,935 |
|
652 |
| ||||
(Loss) gain on financial instruments, net |
|
(2,843 |
) |
4,419 |
|
4,618 |
|
8,994 |
| ||||
Gain (loss) on foreign currency, net |
|
8,849 |
|
(10,391 |
) |
(10,423 |
) |
(19,185 |
) | ||||
Interest expense |
|
(2,441 |
) |
(3,937 |
) |
(8,056 |
) |
(13,481 |
) | ||||
Income before income taxes |
|
235,165 |
|
183,672 |
|
706,533 |
|
564,869 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Income tax expense |
|
(79,789 |
) |
(67,226 |
) |
(250,369 |
) |
(207,907 |
) | ||||
Net income |
|
$ |
155,376 |
|
$ |
116,446 |
|
$ |
456,164 |
|
$ |
356,962 |
|
|
|
|
|
|
|
|
|
|
| ||||
Net income attributable to noncontrolling interests |
|
225 |
|
174 |
|
702 |
|
686 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net income attributable to Keurig |
|
$ |
155,151 |
|
$ |
116,272 |
|
$ |
455,462 |
|
$ |
356,276 |
|
|
|
|
|
|
|
|
|
|
| ||||
Net income attributable to Keurig per common share: |
|
|
|
|
|
|
|
|
| ||||
Basic |
|
$ |
0.95 |
|
$ |
0.78 |
|
$ |
2.93 |
|
$ |
2.39 |
|
Diluted |
|
$ |
0.94 |
|
$ |
0.76 |
|
$ |
2.88 |
|
$ |
2.33 |
|
|
|
|
|
|
|
|
|
|
| ||||
Cash dividends declared per common share |
|
$ |
0.25 |
|
$ |
|
|
$ |
0.75 |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Weighted-average common shares outstanding: |
|
|
|
|
|
|
|
|
| ||||
Basic |
|
162,695,801 |
|
149,825,581 |
|
155,267,136 |
|
149,307,144 |
| ||||
Diluted |
|
164,693,146 |
|
152,869,392 |
|
157,922,095 |
|
152,647,767 |
|
The accompanying Notes to the Unaudited Consolidated Financial Statements are an integral part of these interim financial statements.
KEURIG GREEN MOUNTAIN, INC.
Unaudited Consolidated Statements of Comprehensive Income
(Dollars in thousands)
|
|
Thirteen weeks ended |
|
Thirteen weeks ended |
| ||||||||||||||
|
|
June 28, 2014 |
|
June 29, 2013 |
| ||||||||||||||
|
|
Pre-tax |
|
Tax (expense) |
|
After-tax |
|
Pre-tax |
|
Tax (expense) |
|
After-tax |
| ||||||
Net income |
|
|
|
|
|
$ |
155,376 |
|
|
|
|
|
$ |
116,446 |
| ||||
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Cash flow hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Unrealized losses arising during the period |
|
$ |
(593 |
) |
$ |
183 |
|
$ |
(410 |
) |
$ |
(1,694 |
) |
$ |
684 |
|
$ |
(1,010 |
) |
Losses reclassified to net income |
|
2,491 |
|
(1,023 |
) |
1,468 |
|
394 |
|
(159 |
) |
235 |
| ||||||
Foreign currency translation adjustments |
|
24,094 |
|
|
|
24,094 |
|
(20,689 |
) |
|
|
(20,689 |
) | ||||||
Other comprehensive gain (loss) |
|
$ |
25,992 |
|
$ |
(840 |
) |
$ |
25,152 |
|
$ |
(21,989 |
) |
$ |
525 |
|
$ |
(21,464 |
) |
Total comprehensive income |
|
|
|
|
|
180,528 |
|
|
|
|
|
94,982 |
| ||||||
Total comprehensive gain (loss) attributable to noncontrolling interests |
|
|
|
|
|
795 |
|
|
|
|
|
(349 |
) | ||||||
Total comprehensive income attributable to Keurig |
|
|
|
|
|
$ |
179,733 |
|
|
|
|
|
$ |
95,331 |
|
The accompanying Notes to the Unaudited Consolidated Financial Statements are an integral part of these interim financial statements.
KEURIG GREEN MOUNTAIN, INC.
Unaudited Consolidated Statements of Comprehensive Income
(Dollars in thousands)
|
|
Thirty-nine weeks ended |
|
Thirty-nine weeks ended |
| ||||||||||||||
|
|
June 28, 2014 |
|
June 29, 2013 |
| ||||||||||||||
|
|
Pre-tax |
|
Tax (expense) |
|
After-tax |
|
Pre-tax |
|
Tax (expense) |
|
After-tax |
| ||||||
Net income |
|
|
|
|
|
$ |
456,164 |
|
|
|
|
|
$ |
356,962 |
| ||||
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Cash flow hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Unrealized gains (losses) arising during the period |
|
$ |
17,663 |
|
$ |
(7,150 |
) |
$ |
10,513 |
|
$ |
(972 |
) |
$ |
393 |
|
$ |
(579 |
) |
Losses reclassified to net income |
|
3,933 |
|
(1,604 |
) |
2,329 |
|
1,122 |
|
(453 |
) |
669 |
| ||||||
Foreign currency translation adjustments |
|
(22,150 |
) |
|
|
(22,150 |
) |
(42,044 |
) |
|
|
(42,044 |
) | ||||||
Other comprehensive (loss) |
|
$ |
(554 |
) |
$ |
(8,754 |
) |
$ |
(9,308 |
) |
$ |
(41,894 |
) |
$ |
(60 |
) |
$ |
(41,954 |
) |
Total comprehensive income |
|
|
|
|
|
446,856 |
|
|
|
|
|
315,008 |
| ||||||
Total comprehensive income (loss) attributable to noncontrolling interests |
|
|
|
|
|
219 |
|
|
|
|
|
(348 |
) | ||||||
Total comprehensive income attributable to Keurig |
|
|
|
|
|
$ |
446,637 |
|
|
|
|
|
$ |
315,356 |
|
The accompanying Notes to the Unaudited Consolidated Financial Statements are an integral part of these interim financial statements.
KEURIG GREEN MOUNTAIN, INC.
Unaudited Consolidated Statement of Changes in Stockholders Equity
For the Thirty-nine Weeks Ended June 28, 2014
(Dollars in thousands)
|
|
Common stock |
|
Additional paid- |
|
Retained |
|
Accumulated |
|
Stockholders |
| |||||||
|
|
Shares |
|
Amount |
|
in capital |
|
earnings |
|
loss |
|
equity |
| |||||
Balance at September 28, 2013 |
|
150,265,809 |
|
$ |
15,026 |
|
$ |
1,387,322 |
|
$ |
1,252,407 |
|
$ |
(19,185 |
) |
$ |
2,635,570 |
|
Sale of common stock |
|
18,091,139 |
|
1,809 |
|
1,346,605 |
|
|
|
|
|
1,348,414 |
| |||||
Options exercised |
|
1,804,378 |
|
181 |
|
26,015 |
|
|
|
|
|
26,196 |
| |||||
Issuance of common stock under employee stock purchase plan |
|
108,115 |
|
11 |
|
6,936 |
|
|
|
|
|
6,947 |
| |||||
Restricted stock awards and units |
|
42,231 |
|
4 |
|
(4 |
) |
|
|
|
|
|
| |||||
Repurchase of common stock |
|
(7,699,076 |
) |
(770 |
) |
(996,616 |
) |
|
|
|
|
(997,386 |
) | |||||
Stock compensation expense |
|
|
|
|
|
23,325 |
|
|
|
|
|
23,325 |
| |||||
Tax benefit from equity-based compensation plans |
|
|
|
|
|
52,663 |
|
|
|
|
|
52,663 |
| |||||
Deferred compensation expense |
|
|
|
|
|
163 |
|
|
|
|
|
163 |
| |||||
Adjustment of redeemable noncontrolling interests to redemption value |
|
|
|
|
|
|
|
(1,804 |
) |
|
|
(1,804 |
) | |||||
Other comprehensive loss, net of tax |
|
|
|
|
|
|
|
|
|
(8,827 |
) |
(8,827 |
) | |||||
Net income attributable to Keurig |
|
|
|
|
|
|
|
455,462 |
|
|
|
455,462 |
| |||||
Cash dividends declared |
|
|
|
|
|
|
|
(118,358 |
) |
|
|
(118,358 |
) | |||||
Balance at June 28, 2014 |
|
162,612,596 |
|
$ |
16,261 |
|
$ |
1,846,409 |
|
$ |
1,587,707 |
|
$ |
(28,012 |
) |
$ |
3,422,365 |
|
The accompanying Notes to the Unaudited Consolidated Financial Statements are an integral part of these interim financial statements.
KEURIG GREEN MOUNTAIN, INC.
Unaudited Consolidated Statements of Cash Flows
(Dollars in thousands)
|
|
Thirty-nine |
|
Thirty-nine |
| ||
|
|
weeks ended |
|
weeks ended |
| ||
|
|
June 28, |
|
June 29, |
| ||
Cash flows from operating activities: |
|
|
|
|
| ||
Net income |
|
$ |
456,164 |
|
$ |
356,962 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
| ||
Depreciation and amortization of fixed assets |
|
159,189 |
|
137,734 |
| ||
Amortization of intangibles |
|
32,628 |
|
34,234 |
| ||
Amortization of deferred financing fees |
|
4,238 |
|
4,538 |
| ||
Unrealized loss on foreign currency, net |
|
5,869 |
|
15,555 |
| ||
(Gain) loss on disposal of fixed assets |
|
(603 |
) |
222 |
| ||
Provision for doubtful accounts |
|
2,294 |
|
68 |
| ||
Provision for sales returns |
|
65,853 |
|
59,209 |
| ||
Gain on derivatives, net |
|
(2,082 |
) |
(7,872 |
) | ||
Excess tax benefits from equity-based compensation plans |
|
(52,659 |
) |
(47,845 |
) | ||
Deferred income taxes |
|
(1,206 |
) |
8,794 |
| ||
Deferred compensation and stock compensation |
|
23,488 |
|
21,393 |
| ||
Other |
|
1,020 |
|
881 |
| ||
Changes in assets and liabilities: |
|
|
|
|
| ||
Receivables |
|
14,579 |
|
(32,732 |
) | ||
Inventories |
|
34,433 |
|
175,532 |
| ||
Income tax receivable/payable, net |
|
62,656 |
|
48,905 |
| ||
Other current assets |
|
2,622 |
|
(34,634 |
) | ||
Other long-term assets, net |
|
2,851 |
|
3,311 |
| ||
Accounts payable and accrued expenses |
|
28,117 |
|
39,082 |
| ||
Other current liabilities |
|
(10,419 |
) |
(2,469 |
) | ||
Other long-term liabilities |
|
(5,264 |
) |
(8,633 |
) | ||
Net cash provided by operating activities |
|
823,768 |
|
772,235 |
| ||
|
|
|
|
|
| ||
Cash flows from investing activities: |
|
|
|
|
| ||
Change in restricted cash |
|
90 |
|
2,852 |
| ||
Capital expenditures for fixed assets |
|
(221,887 |
) |
(190,388 |
) | ||
Purchase of long-term investment |
|
(10,000 |
) |
|
| ||
Other investing activities |
|
1,235 |
|
501 |
| ||
Net cash used in investing activities |
|
(230,562 |
) |
(187,035 |
) | ||
|
|
|
|
|
| ||
Cash flows from financing activities: |
|
|
|
|
| ||
Net change in revolving line of credit |
|
|
|
(226,210 |
) | ||
Proceeds from sale of common stock |
|
1,348,414 |
|
|
| ||
Proceeds from issuance of common stock under compensation plans |
|
33,143 |
|
21,764 |
| ||
Repurchase of common stock |
|
(997,386 |
) |
(125,681 |
) | ||
Excess tax benefits from equity-based compensation plans |
|
52,659 |
|
47,845 |
| ||
Payments on capital lease and financing obligations |
|
(1,444 |
) |
(2,596 |
) | ||
Repayment of long-term debt |
|
(9,798 |
) |
(6,640 |
) | ||
Dividends paid |
|
(77,705 |
) |
|
| ||
Other financing activities |
|
(436 |
) |
(1,006 |
) | ||
Net cash provided by (used in) financing activities |
|
347,447 |
|
(292,524 |
) | ||
|
|
|
|
|
| ||
Effect of exchange rate changes on cash and cash equivalents |
|
2,966 |
|
1,240 |
| ||
|
|
|
|
|
| ||
Net increase in cash and cash equivalents |
|
943,619 |
|
293,916 |
| ||
Cash and cash equivalents at beginning of period |
|
260,092 |
|
58,289 |
| ||
Cash and cash equivalents at end of period |
|
$ |
1,203,711 |
|
$ |
352,205 |
|
|
|
|
|
|
| ||
Supplemental disclosures of cash flow information: |
|
|
|
|
| ||
Fixed asset purchases included in accounts payable and not disbursed at the end of each period |
|
$ |
59,646 |
|
$ |
17,998 |
|
Dividends declared not paid at the end of each period |
|
$ |
40,653 |
|
$ |
|
|
Noncash investing and financing activities: |
|
|
|
|
| ||
Fixed assets acquired under capital lease and financing obligations |
|
$ |
33,821 |
|
$ |
23,461 |
|
Settlement of acquisition related liabilities through release of restricted cash |
|
$ |
|
|
$ |
9,227 |
|
The accompanying Notes to the Unaudited Consolidated Financial Statements are an integral part of these interim financial statements.
Keurig Green Mountain, Inc.
Notes to Unaudited Consolidated Financial Statements
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information, the instructions to Form 10-Q, and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete consolidated financial statements.
The September 28, 2013 balance sheet data was derived from audited financial statements but does not include all disclosures required by GAAP. For further information, refer to the consolidated financial statements and the footnotes included in Keurig Green Mountains Annual Report on Form 10-K, as amended, for the fiscal year ended September 28, 2013. Throughout this presentation, we refer to the consolidated company as the Company or Keurig and, unless otherwise noted, the information provided is on a consolidated basis.
In the opinion of management, all adjustments considered necessary for a fair statement of the interim financial data have been included. Interim results may not be indicative of results for a full year. Historically, in addition to variations resulting from the holiday season, sales may vary from quarter-to-quarter due to a variety of other factors including, but not limited to, the cost of green coffee, competitor initiatives, marketing programs and weather.
2. Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition, and most industry-specific guidance. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new standard will require the Company to separate performance obligations within a contract, determine total transaction costs, and ultimately allocate the transaction costs across the established performance obligations. This ASU will become effective for the Company beginning in fiscal 2018 under either full or modified retrospective adoption, with early adoption not permitted. The Company is currently assessing the potential effects of these changes on the Companys net income, financial position and cash flows.
In April 2014, FASB issued ASU No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which raises the threshold for disposals to qualify as discontinued operations. A discontinued operation is defined as: (1) a component of an entity or group of components that has been disposed of or classified as held for sale and represents a strategic shift that has or will have a major effect on an entitys operations and financial results; or (2) an acquired business that is classified as held for sale on the acquisition date. ASU 2014-08 also requires additional disclosures regarding discontinued operations, as well as material disposals that do not meet the definition of discontinued operations. It is effective for annual periods beginning on or after December 15, 2014. Early adoption is permitted but only for disposals that have not been reported in financial statements previously issued. The adoption of ASU 2014-08 is not expected to have a material impact on the Companys net income, financial position or cash flows.
In July 2013, the FASB issued ASU No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (ASU 2013-11). ASU 2013-11 was issued to eliminate diversity in practice regarding the presentation of unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. Under ASU 2013-11, an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. Otherwise, to the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The amendments in this ASU will become effective for the Company beginning in fiscal 2015. The adoption of ASU 2013-11 is not expected to have a material impact on the Companys net income, financial position or cash flows.
In March 2013, the FASB issued 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 will become effective for the Company beginning in fiscal 2015. The adoption of ASU 2013-05 is not expected to have a material impact on the 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 will become effective for the Company beginning in fiscal 2015. Retrospective application is required. The adoption of ASU 2013-04 is not expected to have a material impact on the Companys net income, financial position or cash flows.
3. Segment Reporting
Segment information is prepared on the same basis that our CEO, who is our chief operating decision maker, manages the business, evaluates financial results, and makes key operating decisions. The structure includes a Domestic segment containing all U.S. Operations and immaterial start-up operations related to international expansion, and a Canada segment containing all Canadian operations.
The Domestic segment designs and sells hot beverage system brewers and accessories and sources, produces and sells coffee, hot cocoa, teas and other beverages under a variety of brands in K-Cup®, Vue®, Rivo® and Bolt portion packs (portion packs), and coffee in more traditional packaging, including bags and fractional packs, to retailers including supermarkets, department stores, mass merchandisers, club stores, and convenience stores; to restaurants, hospitality accounts, office coffee distributors, and partner brand owners; and to consumers through Company websites. The Domestic segment primarily distributes its products in the at-home (AH) and away-from-home (AFH) channels, as well as to consumers through Company websites. Substantially all of the Domestic segments distribution to major retailers is processed by third party fulfillment entities which receive and fulfill sales orders and invoice certain retailers primarily in the AH channel. The Domestic segment also earns royalty income from licensees under various licensing agreements.
The Canada segment sells hot beverage system brewers and accessories, and sources, produces and sells coffee and teas and other beverages in portion packs and coffee in more traditional packaging, including bags, cans and fractional packs, under a variety of brands to retailers, including supermarkets, department stores, mass merchandisers, club stores, office coffee distributors, and, through its office coffee services business, to offices, convenience stores, restaurants, hospitality accounts, and to consumers through its website.
Management evaluates the performance of the 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 sustainability expenses, interest expense not directly attributable to an operating segment, the majority of foreign exchange gains or losses, legal expenses, and compensation of the Board of Directors.
The following tables summarize selected financial data for segment disclosures for the thirteen and thirty-nine weeks ended June 28, 2014 and June 29, 2013:
|
|
Thirteen weeks ended June 28, 2014 |
| ||||||||||
|
|
(Dollars in thousands) |
| ||||||||||
|
|
Domestic |
|
Canada |
|
Corporate- |
|
Consolidated |
| ||||
Net sales |
|
$ |
881,102 |
|
$ |
141,269 |
|
$ |
|
|
$ |
1,022,371 |
|
|
|
|
|
|
|
|
|
|
| ||||
Operating income (loss) |
|
$ |
250,486 |
|
$ |
24,781 |
|
$ |
(43,920 |
) |
$ |
231,347 |
|
|
|
|
|
|
|
|
|
|
| ||||
Depreciation and amortization |
|
$ |
48,205 |
|
$ |
15,329 |
|
$ |
2,119 |
|
$ |
65,653 |
|
|
|
|
|
|
|
|
|
|
| ||||
Stock compensation |
|
$ |
3,417 |
|
$ |
476 |
|
$ |
3,713 |
|
$ |
7,606 |
|
|
|
Thirteen weeks ended June 29, 2013 |
| ||||||||||
|
|
(Dollars in thousands) |
| ||||||||||
|
|
Domestic |
|
Canada |
|
Corporate- |
|
Consolidated |
| ||||
Net sales |
|
$ |
822,593 |
|
$ |
144,479 |
|
$ |
|
|
$ |
967,072 |
|
|
|
|
|
|
|
|
|
|
| ||||
Operating income (loss) |
|
$ |
213,076 |
|
$ |
23,658 |
|
$ |
(43,390 |
) |
$ |
193,344 |
|
|
|
|
|
|
|
|
|
|
| ||||
Depreciation and amortization |
|
$ |
44,083 |
|
$ |
16,501 |
|
$ |
625 |
|
$ |
61,209 |
|
|
|
|
|
|
|
|
|
|
| ||||
Stock compensation |
|
$ |
2,615 |
|
$ |
515 |
|
$ |
3,001 |
|
$ |
6,131 |
|
|
|
Thirty-nine weeks ended June 28, 2014 |
| ||||||||||
|
|
(Dollars in thousands) |
| ||||||||||
|
|
Domestic |
|
Canada |
|
Corporate- |
|
Consolidated |
| ||||
Net Sales |
|
$ |
3,043,236 |
|
$ |
468,877 |
|
$ |
|
|
$ |
3,512,113 |
|
|
|
|
|
|
|
|
|
|
| ||||
Operating income (loss) |
|
$ |
761,316 |
|
$ |
77,512 |
|
$ |
(120,369 |
) |
$ |
718,459 |
|
|
|
|
|
|
|
|
|
|
| ||||
Depreciation and amortization |
|
$ |
137,986 |
|
$ |
47,292 |
|
$ |
6,539 |
|
$ |
191,817 |
|
|
|
|
|
|
|
|
|
|
| ||||
Stock compensation |
|
$ |
11,068 |
|
$ |
2,236 |
|
$ |
10,021 |
|
$ |
23,325 |
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
| ||||
Depreciation and amortization |
|
$ |
121,675 |
|
$ |
48,938 |
|
$ |
1,355 |
|
$ |
171,968 |
|
|
|
|
|
|
|
|
|
|
| ||||
Stock compensation |
|
$ |
7,808 |
|
$ |
1,870 |
|
$ |
11,525 |
|
$ |
21,203 |
|
The following table reconciles operating segments and corporate-unallocated operating income (loss) to consolidated income before income taxes, as presented in the Unaudited Consolidated Statements of Operations (in thousands):
|
|
Thirteen weeks ended |
|
Thirty-nine weeks ended |
| ||||||||
|
|
June 28, 2014 |
|
June 29, 2013 |
|
June 28, 2014 |
|
June 29, 2013 |
| ||||
Operating income |
|
$ |
231,347 |
|
$ |
193,344 |
|
$ |
718,459 |
|
$ |
587,889 |
|
Other income, net |
|
253 |
|
237 |
|
1,935 |
|
652 |
| ||||
(Loss) gain on financial instruments, net |
|
(2,843 |
) |
4,419 |
|
4,618 |
|
8,994 |
| ||||
Gain (loss) on foreign currency, net |
|
8,849 |
|
(10,391 |
) |
(10,423 |
) |
(19,185 |
) | ||||
Interest expense |
|
(2,441 |
) |
(3,937 |
) |
(8,056 |
) |
(13,481 |
) | ||||
Income before income taxes |
|
$ |
235,165 |
|
$ |
183,672 |
|
$ |
706,533 |
|
$ |
564,869 |
|
4. Inventories
Inventories consisted of the following (in thousands) as of:
|
|
June 28, |
|
September 28, |
| ||
Raw materials and supplies |
|
$ |
179,866 |
|
$ |
182,882 |
|
Finished goods |
|
459,153 |
|
493,207 |
| ||
|
|
$ |
639,019 |
|
$ |
676,089 |
|
At June 28, 2014, the Company had approximately $410.5 million in green coffee purchase commitments, of which approximately 92% had a fixed price. These commitments primarily extend through fiscal 2016. The value of the variable portion of these commitments was calculated using an average C price of coffee of $1.79 per pound at June 28, 2014. In addition to its green coffee commitments, the Company had approximately $311.5 million in fixed price brewer and related accessory purchase commitments and $1,122.9 million in production raw material commitments at June 28, 2014. The Company believes, based on relationships established with its suppliers, that the risk of non-delivery on such purchase commitments is remote.
As of June 28, 2014, minimum future inventory purchase commitments were as follows (in thousands):
Fiscal Year |
|
Inventory |
| |
Remainder of 2014 |
|
$ |
507,553 |
|
2015 |
|
478,574 |
| |
2016 |
|
264,127 |
| |
2017 |
|
266,950 |
| |
2018 |
|
283,676 |
| |
Thereafter |
|
44,043 |
| |
|
|
$ |
1,844,923 |
|
(1) Certain purchase obligations are determined based on a contractual percentage of forecasted volumes.
5. Fixed Assets
Fixed assets consisted of the following (in thousands) as of:
|
|
Useful Life in Years |
|
June 28, |
|
September 28, |
| ||
Production equipment |
|
1-15 |
|
$ |
747,430 |
|
$ |
680,457 |
|
Coffee service equipment |
|
3-7 |
|
62,494 |
|
59,169 |
| ||
Computer equipment and software |
|
1-7 |
|
161,468 |
|
146,246 |
| ||
Land |
|
Indefinite |
|
11,363 |
|
11,520 |
| ||
Building and building improvements |
|
4-30 |
|
151,656 |
|
134,495 |
| ||
Furniture and fixtures |
|
1-15 |
|
31,024 |
|
33,975 |
| ||
Vehicles |
|
4-5 |
|
12,488 |
|
11,786 |
| ||
Leasehold improvements |
|
1-20 or remaining life of lease, whichever is less |
|
98,682 |
|
98,990 |
| ||
Assets acquired under capital leases |
|
15 |
|
41,200 |
|
41,200 |
| ||
Construction-in-progress |
|
|
|
342,498 |
|
202,940 |
| ||
Total fixed assets |
|
|
|
$ |
1,660,303 |
|
$ |
1,420,778 |
|
Accumulated depreciation and amortization |
|
|
|
(554,655 |
) |
(435,215 |
) | ||
|
|
|
|
$ |
1,105,648 |
|
$ |
985,563 |
|
Assets acquired under capital leases, net of accumulated amortization, were $34.8 million and $36.9 million at June 28, 2014 and September 28, 2013, respectively.
Total depreciation and amortization expense relating to all fixed assets was $55.0 million and $49.9 million for the thirteen weeks ended June 28, 2014 and June 29, 2013, respectively. Total depreciation and amortization expense relating to all fixed assets was $159.2 million and $137.7 million for the thirty-nine weeks ended June 28, 2014 and June 29, 2013, respectively.
As of June 28, 2014, construction-in-progress includes $54.9 million relating to properties under construction where the Company is deemed to be the accounting owner, even though the Company is not the legal owner.
6. Goodwill and Intangible Assets
The following represented the change in the carrying amount of goodwill by segment for the thirty-nine weeks ended June 28, 2014 (in thousands):
|
|
Domestic |
|
Canada |
|
Total |
| |||
Balance at September 28, 2013 |
|
$ |
369,353 |
|
$ |
418,831 |
|
$ |
788,184 |
|
Foreign currency effect |
|
|
|
(14,245 |
) |
(14,245 |
) | |||
Other |
|
|
|
(233 |
) |
(233 |
) | |||
Balance at June 28, 2014 |
|
$ |
369,353 |
|
$ |
404,353 |
|
$ |
773,706 |
|
Indefinite-lived intangible assets included in the Canada segment consisted of the following (in thousands) as of:
|
|
June 28, 2014 |
|
September 28, 2013 |
| ||
Trade names |
|
$ |
94,416 |
|
$ |
97,740 |
|
Intangible Assets Subject to Amortization
Definite-lived intangible assets included in the Domestic segment and Canada segment consisted of the following (in thousands) as of:
|
|
|
|
June 28, 2014 |
|
September 28, 2013 |
| ||||||||
|
|
Useful Life in |
|
Gross Carrying |
|
Accumulated |
|
Gross Carrying |
|
Accumulated |
| ||||
Acquired technology |
|
4-10 |
|
$ |
21,599 |
|
$ |
(18,387 |
) |
$ |
21,609 |
|
$ |
(17,123 |
) |
Customer and roaster agreements |
|
8-11 |
|
25,417 |
|
(21,423 |
) |
26,977 |
|
(19,750 |
) | ||||
Customer relationships |
|
2-16 |
|
404,048 |
|
(136,945 |
) |
414,967 |
|
(113,061 |
) | ||||
Trade names |
|
9-11 |
|
36,627 |
|
(15,933 |
) |
37,200 |
|
(13,353 |
) | ||||
Non-compete agreements |
|
2-5 |
|
374 |
|
(374 |
) |
374 |
|
(364 |
) | ||||
Total |
|
|
|
$ |
488,065 |
|
$ |
(193,062 |
) |
$ |
501,127 |
|
$ |
(163,651 |
) |
Definite-lived intangible assets are amortized on a straight-line basis over the period of expected economic benefit. Total amortization expense was $10.7 million and $11.3 million for the thirteen weeks ended June 28, 2014 and June 29, 2013, respectively. Total amortization expense was $32.6 million and $34.2 million for the thirty-nine weeks ended June 28, 2014 and June 29, 2013, respectively.
The estimated aggregate amortization expense for the remainder of fiscal 2014, for each of the next five years and thereafter, is as follows (in thousands):
Fiscal Year |
|
Amortization Expense |
| |
Remainder of 2014 |
|
$ |
10,446 |
|
2015 |
|
41,680 |
| |
2016 |
|
40,953 |
| |
2017 |
|
39,557 |
| |
2018 |
|
39,557 |
| |
2019 |
|
39,457 |
| |
Thereafter |
|
83,353 |
| |
7. Product Warranties
The Company offers a one-year warranty on all Keurig® hot beverage system brewers it sells. The Company provides for the estimated cost of product warranties, primarily using historical information and repair or replacement costs, at the time product revenue is recognized. Brewer failures may arise in the later part of the warranty period, and actual warranty costs may exceed the reserve. As the Company has grown, it has added significantly to its product testing, quality control infrastructure and overall quality processes. Nevertheless, as the Company continues to innovate, and its products become more complex, both in design and componentry, product performance may modulate, causing warranty rates to possibly fluctuate going forward. As a result, future warranty claims rates may be higher or lower than the Company is currently experiencing and for which the Company is currently providing in its warranty reserve.
The changes in the carrying amount of product warranties for the thirteen and thirty-nine weeks ended June 28, 2014 and June 29, 2013 are as follows (in thousands):
|
|
Thirteen weeks ended |
|
Thirty-nine weeks ended |
| ||||||||
|
|
June 28, 2014 |
|
June 29, 2013 |
|
June 28, 2014 |
|
June 29, 2013 |
| ||||
Balance, beginning of period |
|
$ |
8,525 |
|
$ |
14,456 |
|
$ |
7,804 |
|
$ |
20,218 |
|
Provision related to current period |
|
3,371 |
|
960 |
|
18,435 |
|
17,014 |
| ||||
Change in estimate |
|
(145 |
) |
(1,566 |
) |
(2,628 |
) |
(10,434 |
) | ||||
Usage |
|
(4,716 |
) |
(3,652 |
) |
(16,576 |
) |
(16,600 |
) | ||||
Balance, end of period |
|
$ |
7,035 |
|
$ |
10,198 |
|
$ |
7,035 |
|
$ |
10,198 |
|
For the thirteen and thirty-nine weeks ended June 28, 2014, the Company recorded recoveries of $0.2 million and $0.9 million, respectively. There were no recoveries for the thirteen weeks ended June 29, 2013. For the thirty-nine weeks ended June 29, 2013, the Company recorded recoveries of $0.6 million. The recoveries are under agreements with suppliers and are recorded as a reduction of warranty expense. The recoveries are not reflected in the provision charged to income in the table above.
8. Noncontrolling Interests
Noncontrolling interests (NCI) are evaluated by the Company and are shown as either a liability, temporary equity (shown between liabilities and equity) or as permanent equity depending on the nature of the redeemable features at amounts based on formulas specific to each entity. Generally, mandatorily redeemable NCIs are classified as liabilities and non-mandatorily redeemable NCIs are classified as either temporary or permanent equity. Redeemable NCIs that are not mandatorily redeemable are classified outside of stockholders equity in the Unaudited Consolidated Balance Sheets as temporary equity under the caption, Redeemable noncontrolling interests, and are measured at their redemption values at the end of each period. If the redemption value is greater than the carrying value, an adjustment is recorded in retained earnings to record the NCI at its redemption value. Redeemable NCIs that are mandatorily redeemable are classified as a liability in the Unaudited Consolidated Balance Sheets under the caption, Other current liabilities, and are measured at the amount of cash that would be paid if settlement occurred at the balance sheet date based on the formula in the Share Purchase and Sale Agreement dated June 22, 2012, with any change from the prior period recognized as interest expense.
Net income attributable to NCIs reflects the portion of the net income of consolidated entities applicable to the NCI shareholders in the accompanying Unaudited Consolidated Statements of Operations. The net income attributable to NCIs is classified in the Unaudited Consolidated Statements of Operations as part of consolidated net income and deducted from total consolidated net income to arrive at the net income attributable to the Company.
If a change in ownership of a consolidated subsidiary results in a loss of control or deconsolidation, any retained ownership interests are remeasured with the gain or loss reported to net earnings.
The changes in the liability and temporary equity attributable to redeemable NCIs for the thirty-nine weeks ended June 28, 2014 are as follows (in thousands):
|
|
Liability attributable to |
|
Equity attributable |
| ||
Balance at September 28, 2013 |
|
$ |
4,934 |
|
$ |
11,045 |
|
Net income |
|
314 |
|
388 |
| ||
Adjustment to redemption value |
|
97 |
|
1,804 |
| ||
Cash distributions |
|
(348 |
) |
(491 |
) | ||
Other comprehensive loss |
|
(157 |
) |
(326 |
) | ||
Balance at June 28, 2014 |
|
$ |
4,840 |
|
$ |
12,420 |
|
9. Derivative Financial Instruments
Cash Flow Hedges
The Company is exposed to certain risks relating to ongoing business operations. The primary risks that are mitigated by financial instruments are interest rate risk, commodity price risk and foreign currency exchange rate risk. The Company uses interest rate swaps to mitigate interest rate risk associated with the Companys variable-rate borrowings, enters into coffee futures contracts to hedge future coffee purchase commitments of green coffee with the objective of minimizing cost risk due to market fluctuations, and uses foreign currency forward contracts to hedge the purchase and payment of green coffee purchase commitments denominated in non-functional currencies.
The Company designates these contracts as cash flow hedges and measures the effectiveness of these derivative instruments at each balance sheet date. The effective portion of the derivatives gains or losses, resulting from changes in the fair value of these instruments is classified in accumulated other comprehensive income (loss), net of related tax effects and is reclassified from other comprehensive income (OCI) into earnings in the same period or periods during which the hedged transaction affects earnings. Any ineffective portion of the derivatives gains or losses is recognized in earnings in the period such ineffectiveness occurs. If it is determined that a derivative is not highly effective, the gain or loss is reclassified into earnings.
Fair Value Hedges
The Company occasionally enters into foreign currency forward contracts to hedge certain recognized liabilities in currencies other than the 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 28, 2014, the Company has approximately 1.5 years remaining on a CDN $90.0 million cross currency swap to exchange interest payments and principal on the intercompany note. This cross currency swap is not designated as a hedging instrument for accounting purposes and is recorded at fair value, with the changes in fair value recognized in the Unaudited Consolidated Statements of Operations. Gains and losses resulting from the change in fair value are largely offset by the financial impact of the re-measurement of the intercompany note. In accordance with the cross currency swap agreement, on a quarterly basis, the Company pays interest based on the three month Canadian Bankers Acceptance rate and receives interest based on the three month U.S. Libor rate. Additional interest expense pursuant to the cross currency swap agreement for the thirteen and thirty-nine weeks ended June 28, 2014 was $0.3 million and $1.0 million, respectively. Additional interest expense pursuant to the cross currency swap agreement for the thirteen and thirty-nine weeks ended June 29, 2013 was $0.4 million and $1.3 million, respectively.
The Company occasionally enters into foreign currency forward contracts and coffee futures contracts that qualify as derivatives, and are not designated as hedging instruments for accounting purposes in addition to the foreign currency forward contracts and coffee futures contracts noted above. Contracts that are not designated as hedging instruments are recorded at fair value with the changes in fair value recognized in the Unaudited Consolidated Statements of Operations.
The Company does not hold or use derivative financial instruments for trading or speculative purposes.
The Company is exposed to credit loss in the event of nonperformance by the counterparties to these financial instruments, however nonperformance is not anticipated.
The following table summarizes the fair value of the Companys derivatives included on the Unaudited Consolidated Balance Sheets (in thousands):
|
|
June 28, 2014 |
|
September 28, 2013 |
|
Balance Sheet Classification |
| ||
Derivatives designated as cash flow hedges: |
|
|
|
|
|
|
| ||
Interest rate swaps |
|
$ |
(4,186 |
) |
$ |
(6,004 |
) |
Other current liabilities |
|
Coffee futures |
|
6,419 |
|
|
|
Other current assets |
| ||
Coffee futures |
|
|
|
(3,809 |
) |
Other current liabilities |
| ||
Foreign currency forward contracts |
|
(419 |
) |
(141 |
) |
Other current liabilities |
| ||
Foreign currency forward contracts |
|
|
|
13 |
|
Other current assets |
| ||
|
|
$ |
1,814 |
|
$ |
(9,941 |
) |
|
|
|
|
|
|
|
|
|
| ||
Derivatives not designated as hedges: |
|
|
|
|
|
|
| ||
Cross currency swap |
|
$ |
2,262 |
|
$ |
|
|
Other current assets |
|
Cross currency swap |
|
|
|
(1,253 |
) |
Other current liabilities |
| ||
|
|
$ |
2,262 |
|
$ |
(1,253 |
) |
|
|
|
|
|
|
|
|
|
| ||
Total |
|
$ |
4,076 |
|
$ |
(11,194 |
) |
|
|
Offsetting
Generally, all of the Companys derivative instruments are subject to a master netting arrangement under which either party may offset amounts if the payment amounts are for the same transaction and in the same currency. By election, parties may agree to net other transactions. In addition, the arrangements provide for the net settlement of all contracts through a single payment in a single currency in the event of default or termination of the contract. The Companys policy is to net all derivative assets and liabilities in the accompanying Unaudited Consolidated Balance Sheets when allowable by GAAP.
Additionally, the Company has elected to include all derivative assets and liabilities, including those not subject to a master netting arrangement, in the following offsetting tables.
Offsetting of financial assets and derivative assets as of June 28, 2014 and September 28, 2013 is as follows (in thousands):
|
|
Gross |
|
Gross amounts |
|
Net amount of |
|
Gross amounts not offset in the |
|
|
| ||||||||
|
|
amounts of |
|
offset in the |
|
in the |
|
Financial |
|
Cash |
|
Net amount |
| ||||||
Derivative assets, as of June 28, 2014 |
|
$ |
10,230 |
|
$ |
(1,549 |
) |
$ |
8,681 |
|
$ |
|
|
$ |
|
|
$ |
8,681 |
|
Derivative assets, as of September 28, 2013 |
|
13 |
|
|
|
13 |
|
|
|
|
|
13 |
| ||||||
Offsetting of financial liabilities and derivative liabilities as of June 28, 2014 and September 28, 2013 is as follows (in thousands):
|
|
Gross |
|
Gross amounts |
|
Net amount of |
|
Gross amounts not offset in the |
|
|
| ||||||||
|
|
amounts of |
|
offset in the |
|
presented in the |
|
Financial |
|
Cash |
|
Net amount |
| ||||||
Derivative liabilities, as of June 28, 2014 |
|
$ |
6,154 |
|
$ |
(1,549 |
) |
$ |
4,605 |
|
$ |
|
|
$ |
|
|
$ |
4,605 |
|
Derivative liabilities, as of September 28, 2013 |
|
11,207 |
|
|
|
11,207 |
|
|
|
|
|
11,207 |
| ||||||
The following table summarizes the amount of unrealized gain (loss), gross of tax, arising during the period on financial instruments that qualify for hedge accounting included in OCI (in thousands):
|
|
Thirteen weeks ended |
|
Thirty-nine weeks ended |
| ||||||||
|
|
June 28, 2014 |
|
June 29, 2013 |
|
June 28, 2014 |
|
June 29, 2013 |
| ||||
Cash Flow Hedges: |
|
|
|
|
|
|
|
|
| ||||
Interest rate swaps |
|
$ |
613 |
|
$ |
1,020 |
|
$ |
1,819 |
|
$ |
2,690 |
|
Coffee futures |
|
(787 |
) |
(2,714 |
) |
15,998 |
|
(3,662 |
) | ||||
Foreign currency forward contracts |
|
(419 |
) |
|
|
(154 |
) |
|
| ||||
Total |
|
$ |
(593 |
) |
$ |
(1,694 |
) |
$ |
17,663 |
|
$ |
(972 |
) |
The following table summarizes the amount of gains (losses), gross of tax, reclassified from OCI to income (in thousands):
|
|
Thirteen weeks ended |
|
Thirty-nine weeks ended |
|
Location of Gains |
| ||||||||
|
|
June 28, |
|
June 29, |
|
June 28, |
|
June 29, |
|
(Losses) Reclassified |
| ||||
Coffee futures |
|
$ |
(2,626 |
) |
$ |
(394 |
) |
$ |
(4,067 |
) |
$ |
(1,122 |
) |
Cost of sales |
|
Foreign currency forward contracts |
|
135 |
|
|
|
136 |
|
|
|
Cost of sales |
| ||||
Foreign currency forward contracts |
|
|
|
|
|
(2 |
) |
|
|
Gain (loss) on foreign currency, net |
| ||||
Total |
|
$ |
(2,491 |
) |
$ |
(394 |
) |
$ |
(3,933 |
) |
$ |
(1,122 |
) |
|
|
The Company expects to reclassify $5.8 million of net gains, net of tax, from OCI to earnings for coffee derivatives within the next twelve months.
There were no gains or losses on fair value hedges related to foreign currency forward contracts for the thirteen weeks ended June 28, 2014 and June 29, 2013. The following table summarizes the amount of gain (loss), gross of tax, on fair value hedges and related hedged items for the thirty-nine weeks ended June 28, 2014, and June 29, 2013 (in thousands):
|
|
Thirty-nine weeks ended |
|
|
| ||||||||||
|
|
June 28, 2014 |
|
June 29, 2013 |
|
|
| ||||||||
|
|
Gain (loss) on |
|
Gain (loss) on |
|
Gain (loss) on |
|
Gain (loss) on |
|
Location of Gain (Loss) Recognized |
| ||||
Foreign currency forward contracts |
|
$ |
|
|
$ |
|
|
$ |
(10 |
) |
$ |
10 |
|
Gain (loss) on foreign currency, net |
|
See Note 12, Stockholders Equity, for a reconciliation of derivatives in beginning accumulated other comprehensive income (loss) to derivatives in ending accumulated other comprehensive income (loss).
Net (losses) gains on financial instruments not designated as hedges for accounting purposes are as follows (in thousands):
|
|
Thirteen weeks ended |
|
Thirty-nine weeks ended |
|
Location of net (loss) gain in |
| ||||||||
|
|
June 28, |
|
June 29, |
|
June 28, |
|
June 29, |
|
Unaudited Consolidated |
| ||||
Net (loss) gain on cross currency swap |
|
$ |
(2,843 |
) |
$ |
4,419 |
|
$ |
4,618 |
|
$ |
8,994 |
|
(Loss) gain on financial instruments, net |
|
Net gain on coffee futures |
|
829 |
|
|
|
7,005 |
|
|
|
Cost of sales |
| ||||
Total |
|
$ |
(2,014 |
) |
$ |
4,419 |
|
$ |
11,623 |
|
$ |
8,994 |
|
|
|
In addition, for the thirteen and thirty-nine weeks ended June 28, 2014, the Company recognized $0.02 million in net losses and $1.3 million in net gains, respectively, as a cost of sale representing the ineffective portion on coffee futures designated as cash flow hedges. No amounts were recognized for the thirteen and thirty-nine weeks ended June 29, 2013 for ineffectiveness.
10. Fair Value Measurements
The Company measures fair value as the selling price that would be received for an asset, or paid to transfer a liability, in the principal or most advantageous market on the measurement date. The hierarchy established by the FASB prioritizes fair value measurements based on the types of inputs used in the valuation technique. The inputs are categorized into the following levels:
Level 1 Observable inputs such as quoted prices in active markets for identical assets or liabilities.
Level 2 Inputs other than quoted prices that are observable, either directly or indirectly, which include quoted prices for similar assets or liabilities in active markets and quoted prices for identical assets or liabilities in markets that are not active.
Level 3 Unobservable inputs not corroborated by market data, therefore requiring the entity to use the best available information, including management assumptions.
The following table summarizes the fair values and the levels used in fair value measurements as of June 28, 2014 for the Companys financial assets (liabilities) (in thousands):
|
|
Fair Value Measurements Using |
| |||||||
|
|
Level 1 |
|
Level 2 |
|
Level 3 |
| |||
Derivatives: |
|
|
|
|
|
|
| |||
Interest rate swaps |
|
$ |
|
|
$ |
(4,186 |
) |
$ |
|
|
Cross currency swap |
|
|
|
2,262 |
|
|
| |||
Coffee futures |
|
|
|
6,419 |
|
|
| |||
Foreign currency forward contracts |
|
|
|
(419 |
) |
|
| |||
Total |
|
$ |
|
|
$ |
4,076 |
|
$ |
|
|
The following table summarizes the fair values and the levels used in fair value measurements as of September 28, 2013 for the Companys financial liabilities (in thousands):
|
|
Fair Value Measurements Using |
| |||||||
|
|
Level 1 |
|
Level 2 |
|
Level 3 |
| |||
Derivatives: |
|
|
|
|
|
|
| |||
Interest rate swaps |
|
$ |
|
|
$ |
(6,004 |
) |
$ |
|
|
Cross currency swap |
|
|
|
(1,253 |
) |
|
| |||
Coffee futures |
|
|
|
(3,809 |
) |
|
| |||
Forward currency forward contracts |
|
|
|
(128 |
) |
|
| |||
Total |
|
$ |
|
|
$ |
(11,194 |
) |
$ |
|
|
Derivatives
Level 2 derivative financial instruments use inputs that are based on market data of identical (or similar) instruments, including forward prices for commodities, interest rate curves and spot prices that are in observable markets. Derivatives recorded on the balance sheet are at fair value with changes in fair value recorded in other comprehensive income for cash flow hedges and in the Unaudited Consolidated Statements of Operations for fair value hedges and derivatives that do not qualify for hedge accounting treatment.
Derivative financial instruments include coffee futures contracts, interest rate swap agreements, a cross currency swap agreement and foreign currency forward contracts. The Company has identified significant concentrations of credit risk based on the economic characteristics of the instruments that include interest rates, commodity indexes and foreign currency rates and selectively enters into the derivative instruments with counterparties using credit ratings.
To determine fair value, the Company utilizes the market approach valuation technique for coffee futures and foreign currency forward contracts and the income approach for interest rate and cross currency swap agreements. The Companys fair value measurements include a credit valuation adjustment for the significant concentrations of credit risk.
As of June 28, 2014, the amount of loss estimated by the Company due to credit risk associated with the derivatives for all significant concentrations was not material based on the factors of an industry recovery rate and a calculated probability of default.
Long-Term Debt
The carrying value of long-term debt was $163.7 million and $173.2 million as of June 28, 2014 and September 28, 2013, respectively. The inputs to the calculation of the fair value of long-term debt are considered to be Level 2 within the fair value hierarchy, as the measurement of fair value is based on the net present value of calculated interest and principal payments, using an interest rate derived from a fair market yield curve adjusted for the 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.
Long-Term Investment
The Company has a long-term investment of approximately $10.0 million included in other long-term assets in the accompanying Unaudited Consolidated Balance Sheet as of June 28, 2014, that is not publicly traded. This investment is carried at cost and reviewed quarterly for indicators of other-than-temporary impairment. There were no events or circumstances during the fiscal quarter ended June 28, 2014 that indicated a decline in the fair value of the investment.
11. Income Taxes
The Company recognizes deferred tax assets and liabilities for the expected future tax benefits or consequences of temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled.
As of June 28, 2014, the Company had a $17.7 million state capital loss carryforward and a state net operating loss carryforward of $11.5 million available to be utilized against future taxable income for years through fiscal 2015 and 2029, respectively, subject to annual limitation pertaining to change in ownership rules under the Internal Revenue Code of 1986, as amended. Based upon earnings history, the Company concluded that it is more likely than not that the net operating loss carryforward will be utilized prior to its expiration, but that the capital loss carryforward will not. The Company has recorded a valuation allowance against the entire deferred tax asset balance for the capital loss carryforward.
The total amount of unrecognized tax benefits as of June 28, 2014 and September 28, 2013 was $17.2 million and $23.3 million, respectively. The amount of unrecognized tax benefits at June 28, 2014 that would impact the effective tax rate if resolved in favor of the Company is $17.2 million. As a result of prior acquisitions, the Company is indemnified for $9.5 million of the total reserve balance, and the indemnification is capped at CDN $37.9 million. If these unrecognized tax benefits are resolved in favor of the Company, the associated indemnification receivable, recorded in other long-term assets, would be reduced accordingly. The indemnifications have expiration dates through June 2015.
As of June 28, 2014 and September 28, 2013, accrued interest and penalties of $2.4 million and $2.0 million, respectively, were included in the Consolidated Balance Sheets. The Company recognizes interest and penalties in income tax expense. The Company released $3.2 million of unrecognized tax benefits in the current quarter of fiscal 2014 and expects to release an additional $5.1 million over the next twelve months due to the expiration of the statute of limitations.
In the normal course of business, the Company is subject to tax examinations by taxing authorities both inside and outside of the United States. Generally speaking, the Company is no longer subject to examination with respect to returns filed for fiscal years prior to 2010.
12. Stockholders Equity
Stock Repurchase Program
Throughout various times during fiscal 2012, 2013, and 2014, Keurigs Board of Directors authorized the Company to repurchase a total of $2.5 billion of the Companys common stock.
Under its existing repurchase programs, on February 28, 2014, the Company entered into an accelerated share repurchase (ASR) agreement with a major financial institution (Bank). The ASR allows the Company to buy a large number of shares immediately at a purchase price determined by an average market price over a period of time. Under the ASR, the Company agreed to purchase $700.0 million of its common stock, in total, with an initial delivery to the Company of 4,340,508 shares (Initial Shares) of the Companys common stock by the Bank. The Initial Shares represent the number of shares at the current market price equal to 70% of the total fixed purchase price of $700.0 million. The repurchased shares were retired and returned to an unissued status. The par value of the repurchased shares of $0.4 million was deducted from common stock and the excess repurchase price over the par value of $489.6 million was deducted from additional paid-in capital. The remainder of the total purchase price of $210.0 million reflects the value of the stock held by the Bank pending final settlement and, accordingly, was recorded as a reduction to additional paid-in capital. Final settlement of the ASR will occur no sooner than November 24, 2014 and no later than February 27, 2015 at the Banks discretion. Upon settlement of the ASR, the total shares repurchased by the Company will be determined based on a share price equal to the daily volume weighted-average price (VWAP) of the Companys common stock during the term of the ASR program, less a fixed per share discount amount. At settlement, the Bank will deliver additional shares to the Company in the event total shares are greater than the 4,340,508 shares initially delivered, and the Company will issue additional shares to the Bank in the event total shares are less than the shares initially delivered. The receipt or issuance of additional shares will result in a reclassification between additional paid-in capital and common stock equal to the par value of the additional shares received or issued. The number of shares that may be required to be issued by the Company to the Bank is limited to 10.0 million shares under the ASR.
The Company reflected the unsettled portion of the ASR ($210.0 million) as a repurchase of common stock for purposes of calculating earnings per share and as a forward contract indexed to its own common stock. The forward contract met all of the applicable criteria for equity classification, and, therefore, was not accounted for as a derivative instrument.
As of June 28, 2014, based on the VWAP of the Companys common stock for the period February 28, 2014 through June 28, 2014, settlement of the ASR would have resulted in 2.3 million additional shares delivered by the Bank to the Company.
An aggregate amount of $1,237.9 million remained authorized for common stock repurchase as of June 28, 2014.
Summary of share repurchase activity:
|
|
Thirty-nine weeks ended |
|
|
| ||
|
|
June 28, 2014(1) |
|
Fiscal 2013 |
| ||
Number of shares acquired |
|
7,699,076 |
|
5,642,793 |
| ||
Average price per share of acquired shares |
|
$ |
102.27 |
|
$ |
33.37 |
|
Total cost of acquired shares (in thousands) |
|
$ |
997,386 |
|
$ |
188,278 |
|
(1)Number of shares acquired and average price per share reflect Initial Shares at then current market price, subject to change pending final settlement, and total cost of acquired shares includes total purchase price of $700.0 million under the ASR.
Accumulated Other Comprehensive Income (Loss)
The following table provides the changes in the components of accumulated other comprehensive income (loss), net of tax (in thousands) for the thirty-nine weeks ended June 28, 2014:
|
|
Cash Flow Hedges |
|
Translation |
|
Accumulated Other |
| |||
Balance at September 28, 2013 |
|
$ |
(7,150 |
) |
$ |
(12,035 |
) |
$ |
(19,185 |
) |
Other comprehensive loss, before reclassifications |
|
10,513 |
|
(21,667 |
) |
(11,154 |
) | |||
Amounts reclassified from accumulated other comprehensive income (loss) |
|
2,329 |
|
|
|
2,329 |
| |||
Foreign currency exchange impact on cash flow hedges |
|
(2 |
) |
|
|
(2 |
) | |||
Net current period other comprehensive loss |
|
12,840 |
|
(21,667 |
) |
(8,827 |
) | |||
Balance at June 28, 2014 |
|
$ |
5,690 |
|
$ |
(33,702 |
) |
$ |
(28,012 |
) |
The unfavorable translation adjustment change during the thirty-nine weeks ended June 28, 2014 was primarily due to the weakening of the Canadian dollar against the U.S. dollar. The favorable cash flow hedges during the thirty-nine weeks ended June 28, 2014 was primarily due to increases in C price of coffee. See also Note 9, Derivative Financial Instruments.
Common Stock Sales
On February 27, 2014, the Company sold 16,684,139 shares of its common stock to Atlantic Industries, an indirect wholly owned subsidiary of The Coca-Cola Company, at $74.98 per share for an aggregate purchase price of $1,251.0 million, pursuant to a common stock purchase agreement dated February 5, 2014. In addition, pursuant to pre-emptive rights set forth in the common stock purchase agreement (CSPA) between the Company and Luigi Lavazza S.p.A (Lavazza) dated August 10, 2010, on March 28, 2014, the Company entered into another common stock purchase agreement with Lavazza to sell 1,407,000 shares of its common stock to Lavazza at $74.98 per share for an aggregate purchase price of $105.5 million. Pursuant to the CSPA, in connection with the proposed offering of common stock to Atlantic Industries, Lavazza is entitled to maintain its current percentage ownership of the Companys outstanding common stock on terms (including price) not less favorable than those proposed for the Atlantic Industries offering. The Lavazza transaction closed on April 17, 2014. Both common stock sales were recorded to stockholders equity during the thirty-nine weeks ended June 28, 2014, net of transaction-related expenses of approximately $8.0 million.
Common Stock Dividends
During the third quarter of fiscal 2014, the Company declared a quarterly dividend of $0.25 per common share, or $40.7 million in the aggregate, payable on August 1, 2014 to shareholders of record on July 3, 2014. During the thirty-nine weeks ended June 28, 2014, the Company paid dividends of approximately $77.7 million.
On August 4, 2014, the Companys Board of Directors declared the Companys next regular quarterly cash dividend of $0.25 per common share, payable on October 31, 2014, to shareholders of record as of the close of business on October 3, 2014.
No cash dividends were declared or paid in fiscal 2013.
13. Compensation Plans
Stock Option Plans
The grant-date fair value of employee stock options and similar instruments is estimated using the Black-Scholes option-pricing model with the following assumptions for grants issued during the thirty-nine weeks ended June 28, 2014 and June 29, 2013:
|
|
Thirty-nine weeks ended |
| ||||
|
|
June 28, |
|
June 29, |
| ||
Average expected life |
|
5.5 years |
|
6.0 years |
| ||
Average volatility |
|
74 |
% |
81 |
% | ||
Dividend yield |
|
1.31 |
% |
|
% | ||
Risk-free interest rate |
|
1.70 |
% |
1.02 |
% | ||
Weighted average fair value |
|
$ |
42.04 |
|
$ |
31.17 |
|
Restricted Stock Units and Other Awards
The Company awards restricted stock units (RSUs), restricted stock awards (RSAs) and performance stock units (PSUs) to eligible employees (Grantee) which entitle a Grantee to receive shares of the 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. All awards are reserved for issuance under the Companys Amended and Restated 2006 Incentive Plan (the 2006 Plan) and the Companys 2014 Omnibus Incentive Plan. The awards vest over periods determined by the Board of Directors, generally in the range of three to four years for RSUs and RSAs, and three years for PSUs.
In addition, in fiscal 2013 the Company awarded deferred cash awards (DCAs) to Grantees which entitle a Grantee to receive cash over time upon vesting. The vesting of DCAs is over a four year period conditioned on a Grantees continued employment.
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 28, 2014 and June 29, 2013:
|
|
Thirty-nine weeks ended |
| ||||
|
|
June 28, |
|
June 29, |
| ||
Average expected life |
|
6 months |
|
6 months |
| ||
Average volatility |
|
55 |
% |
86 |
% | ||
Dividend yield |
|
1.14 |
% |
|
% | ||
Risk-free interest rate |
|
0.06 |
% |
0.13 |
% | ||
Weighted average fair value |
|
$ |
27.28 |
|
$ |
14.38 |
|
Income before income taxes in the Unaudited Consolidated Statements of Operations includes compensation expense related to the plans described above of $7.6 million and $6.1 million for the thirteen weeks ended June 28, 2014 and June 29, 2013, respectively; and $23.3 million and $21.2 million for the thirty-nine weeks ended June 28, 2014 and June 29, 2013, respectively.
14. Legal Proceedings
On May 9, 2011, an organization named Council for Education and Research on Toxics (CERT), purporting to act in the public interest, filed suit in Los Angeles Superior Court (Council for Education and Research on Toxics v. Brad Barry LLC, et al., Case No. BC461182) against several companies, including the Company, that roast, package, or sell coffee in California. The Brad Barry complaint alleges that coffee contains the chemical acrylamide and that the Company and the other defendants are required to provide warnings under section 25249.6 of the California Safe Drinking Water and Toxics Enforcement Act, better known as Proposition 65. Acrylamide is not added to coffee, but forms in trace amounts (parts per billion) as part of a chemical reaction that occurs in the coffee bean when it is roasted. Therefore it is present in all roasted coffee. To date, the Company is unaware of any reliable method for reducing acrylamide levels in coffee without adversely affecting the quality of the product. The Brad Barry action has been consolidated for all purposes with another Proposition 65 case filed by CERT on April 13, 2010 over allegations of acrylamide in ready to drink coffee sold in restaurants, convenience stores, and donut shops. (Council for Education and Research on Toxics v. Starbucks Corp., et al., Case No. BC 415759). The Company was not named in the Starbucks complaint. The Company has joined a joint defense group (JDG) organized to address CERTs allegations, and the Company intends to vigorously defend against these allegations. The Court has ordered the case phased for discovery and trial. The first phase of the case, which has been set for trial on September 8, 2014, is limited to three affirmative defenses shared by all defendants in both cases, with other affirmative defenses, plaintiffs prima facie case, and remedies deferred for subsequent phases. Fact discovery on the first phase of the case was completed in January 2014 and expert discovery was completed in July 2014. At this start of the proceedings, the Company is unable to predict its outcome, the potential loss or range of loss, if any, associated with its resolution or any potential effect it may have on the Company or its operations.
On January 24, 2012, Teashot, LLC (Teashot) filed suit against the Company, Keurig and Starbucks Corp. (Starbucks) in the United States District Court for the District of Colorado (Civil Action No. 12-cv-00189-WJM-KMT) for patent infringement related to the making, using, importing, selling and/or offering for sale of K-Cup® portion packs containing tea. The suit alleges that the Company, Keurig and Starbucks infringe a Teashot patent (U.S. Patent No. 5,895,672). Teashot seeks an injunction prohibiting the Company, Keurig and Starbucks from continued infringement, as well as money damages. Pursuant to the Companys Manufacturing, Sales and Distribution Agreement with Starbucks, the Company is defending and indemnifying Starbucks in connection with the suit. On May 24, 2013, the Company and Keurig, for themselves and Starbucks, filed a motion for summary judgment of non-infringement. On July 19, 2013, Teashot filed a motion for partial summary judgment on certain other, unrelated issues. On February 6, 2014, the district court granted the Companys motion for summary judgment and denied Teashots motion. The court also awarded the Company its costs. On February 27, 2014, Teashot filed a notice of appeal with the United States Court of Appeals for the Federal Circuit seeking review of the District Courts decision. That appeal is now pending, and oral argument has not been scheduled. At this time, the Company is unable to predict the outcome of this lawsuit, the potential loss or range of loss, if any, associated with the resolution of this lawsuit or any potential effect it may have on the Company or its operations.
Securities and Exchange Commission (SEC) Inquiry
As first disclosed on September 28, 2010, the staff of the 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
Two putative securities fraud class actions are presently pending against the Company and certain of its officers and directors, along with two putative stockholder derivative actions. The first pending putative securities fraud class action was filed on November 29, 2011, and the second putative securities fraud class action was filed on May 7, 2012. The first putative stockholder derivative action is a consolidated action pending in the United States District Court for the District of Vermont that consists of five separate putative stockholder derivative complaints, the first two were filed after the 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. The second putative stockholder derivative action is pending in the Superior Court of the State of Vermont for Washington County and was commenced following the Companys disclosure of the SEC inquiry on September 28, 2010.
The first putative securities fraud class action, captioned Louisiana Municipal Police Employees Retirement System (LAMPERS) v. Green Mountain Coffee Roasters, Inc., et al., Civ. No. 2:11-cv-00289, was filed in the United States District Court for the District of Vermont before the Honorable William K. Sessions, III. Plaintiffs amended complaint alleged violations of the federal securities laws in connection with the Companys disclosures relating to its revenues and its inventory accounting practices.
The amended complaint sought class certification, compensatory damages, attorneys fees, costs, and such other relief as the court should deem just and proper. Plaintiffs sought to represent all purchasers of the 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 Retirement System, Employees Retirement System of the Government of the Virgin Islands, and Public Employees Retirement System of Mississippi as lead plaintiffs counsel on April 27, 2012. Pursuant to a schedule approved by the court, plaintiffs filed their amended complaint on October 22, 2012, and plaintiffs filed a corrected amended complaint on November 5, 2012. Plaintiffs amended complaint did not allege any claims under the Securities Act against the Company, its officers and directors, or the Companys underwriters in connection with the May 2011 secondary common stock offering. Defendants moved to dismiss the amended complaint on March 1, 2013 and on December 20, 2013, the court issued an order dismissing the amended complaint with prejudice. On January 21, 2014, plaintiffs filed a notice of intent to appeal the courts December 20, 2013 order to the United States Court of Appeals for the Second Circuit. Pursuant to a schedule entered by the appeals court, briefing on the appeal was completed on June 23, 2014. The Second Circuit has tentatively scheduled oral argument to occur during the week of October 27, 2014. The underwriters previously named as defendants notified the Company of their intent to seek indemnification from the Company pursuant to their underwriting agreement dated May 5, 2011 in regard to the claims asserted in this action.
The second putative securities fraud class action, captioned Fifield v. Green Mountain Coffee Roasters, Inc., Civ. No. 2:12-cv-00091, was also filed in the United States District Court for the District of Vermont before the Honorable William K. Sessions, III. Plaintiffs amended complaint alleged violations of the federal securities laws in connection with the Companys disclosures relating to its forward guidance. The amended complaint included counts for alleged violations of Section 10(b) of the Exchange Act and Rule 10b-5 against all defendants, and for alleged violation of Section 20(a) of the Exchange Act against the officer defendants. The amended complaint sought class certification, compensatory damages, equitable and/or injunctive relief, attorneys fees, costs, and such other relief as the court should deem just and proper. Plaintiffs sought to represent all purchasers of the 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. On September 26, 2013, the court issued an order granting defendants motions and dismissing the amended complaint without prejudice and allowing plaintiffs a 30-day period within which to amend their complaint. On October 18, 2013, plaintiffs filed a notice of intent to appeal the courts September 26, 2013 order to the United States Court of Appeals for the Second Circuit. On July 8, 2014, the Second Circuit issued a mandate affirming dismissal of the action.
The first putative stockholder derivative action, a consolidated action captioned In re Green Mountain Coffee Roasters, Inc. Derivative Litigation, Civ. No. 2:10-cv-00233, premised on the same allegations asserted in the now dismissed Horowitz v. Green Mountain Coffee Roasters, Inc., Civ. No. 2:10-cv-00227 securities class action complaint and the other pending putative securities class action complaints described above, is pending in the United States District Court for the District of Vermont before the Honorable William K. Sessions, III. On November 29, 2010, the federal court entered an order consolidating two actions and appointing the firms of Robbins Umeda LLP and Shuman Law Firm as co-lead plaintiffs counsel. On February 23, 2011, the federal court approved a stipulation filed by the parties providing for a temporary stay of that action until the court rules on defendants motions to dismiss the consolidated complaint in the Horowitz putative securities fraud class action. On March 7, 2012, the federal court approved a further joint stipulation continuing the temporary stay until the court either denies a motion to dismiss the Horowitz putative securities fraud class action or the Horowitz putative securities fraud class action is dismissed with prejudice. On April 27, 2012, the federal court entered an order consolidating the stockholder derivative action captioned Himmel v. Robert P. Stiller, et al., with two additional putative derivative actions, Musa Family Revocable Trust v. Robert P. Stiller, et al., Civ. No. 2:12-cv-00029, and Laborers Local 235 Benefit Funds v. Robert P. Stiller, et al., Civ. No. 2:12-cv- 00042. On November 14, 2012, the federal court entered an order consolidating an additional stockholder derivative action, captioned Henry Cargo v. Robert P. Stiller, et al., Civ. No. 2:12-cv-00161, and granting plaintiffs leave to lift the stay for the limited purpose of filing a consolidated complaint.
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, 2013, the parties filed a further joint stipulation continuing the temporary stay until the court either denies a motion to dismiss the LAMPERS putative securities fraud class action or the LAMPERS putative securities fraud class action is dismissed with prejudice, which the court approved on August 2, 2013. On February 24, 2014, the court approved a further joint stipulation filed by the parties continuing the temporary stay until the appeals court rules on the pending appeal in the LAMPERS putative securities fraud class action.
The second putative stockholder derivative action, M. Elizabeth Dickinson v. Robert P. Stiller, et al., Civ. No. 818-11-10, is pending in the Superior Court of the State of Vermont for Washington County. On February 28, 2011, the court approved a stipulation filed by the parties similarly providing for a temporary stay of that action until the federal court rules on defendants motions to dismiss the consolidated complaint in the Horowitz putative securities fraud class action. As a result of the federal 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. On August 7, 2013, the parties filed a further joint stipulation continuing the temporary stay until the court either denies a motion to dismiss the LAMPERS putative securities fraud class action or the LAMPERS putative securities fraud class action is dismissed with prejudice, which the court approved on August 21, 2013. On April 21, 2014, the court approved a joint stipulation filed by the parties continuing the temporary stay until the appeals court rules on the pending appeal in the LAMPERS putative securities fraud class action, which remains pending with the court for approval.
The Company and the other defendants intend to vigorously defend all the pending lawsuits. Additional lawsuits may be filed and, at this time, the Company is unable to predict the outcome of these lawsuits, the possible loss or range of loss, if any, associated with the resolution of these lawsuits or any potential effect they may have on the Company or its operations.
Antitrust Litigation
On February 11, 2014, TreeHouse Foods, Inc., Bay Valley Foods, LLC, and Sturm Foods, Inc. filed suit against Green Mountain Coffee Roasters, Inc. and Keurig, Inc. in the U.S. District Court for the Southern District of New York (TreeHouse Foods, Inc. et al. v. Green Mountain Coffee Roasters, Inc. et al., No. 1:14-cv-00905-VSB). The TreeHouse complaint asserts claims under the federal antitrust laws and various state laws, contending that the Company has monopolized alleged markets for single serve coffee brewers and single serve coffee portion packs, including through its contracts with suppliers and distributors and in connection with the launch of its next generation coffee brewer. The TreeHouse complaint seeks monetary damages, declaratory relief, injunctive relief, and attorneys fees.
On March 13, 2014, JBR, Inc. (d/b/a Rogers Family Company) filed suit against Keurig Green Mountain, Inc. in the U.S. District Court for the Eastern District of California (JBR, Inc. v. Keurig Green Mountain, Inc., No. 2:14-cv-00677-KJM-CKD). The claims asserted and relief sought in the JBR complaint are substantially similar to the claims asserted and relief sought in the TreeHouse complaint.
Additionally, beginning on March 10, 2014, twenty-six putative class actions asserting similar claims and seeking similar relief have been filed on behalf of purported direct and indirect purchasers of the Companys products in various federal district courts. On March 20, 2014, a motion was filed before the Judicial Panel on Multidistrict Litigation (the Panel) to transfer these various actions, including the TreeHouse and JBR actions, to a single judicial district for coordinated or consolidated pre-trial proceedings. On June 3, 2014, the Panel granted the transfer motion, transferring the actions to the U.S. District Court for the Southern District of New York for coordinated or consolidated pre-trial proceedings. The actions are now pending before Judge Vernon S. Broderick in the Southern District of New York (In re: Keurig Green Mountain Single-Serve Coffee Antitrust Litigation, No. 1:14-md-02542-VSB).
A conference was held on June 19, 2014 in the Southern District of New York before Judge Broderick. Plaintiffs in the TreeHouse and JBR actions stated that they intended to seek expedited discovery in aid of possible preliminary injunction motions. On June 23, 2014, plaintiffs in the TreeHouse and JBR actions filed a joint motion to expedite discovery, which the Court granted in part and denied in part on July 23, 2014. On July 30, 2014, the Court directed that plaintiffs have until August 11, 2014 to move for a preliminary injunction. A preliminary injunction hearing is provisionally scheduled for September 3, 2014.
Consolidated putative class action complaints by direct purchaser and indirect purchaser plaintiffs were filed on July 24, 2014. The Companys motions to dismiss these complaints and the complaints in the TreeHouse and JBR actions are currently due August 25, 2014 and will be fully briefed under the current schedule on October 8, 2014.
The Company intends vigorously to defend all of the pending lawsuits, including by moving to dismiss the actions and opposing any motion for a preliminary injunction.
15. Related Party Transactions
FMR Corp. (FMR) reported on a Schedule 13G/A filed with the Securities and Exchange Commission on February 14, 2014 beneficial ownership of shares that represented more than 10% of the Companys outstanding common stock. As of June 28, 2014, and September 28, 2013, the Company held investments in cash and cash equivalents in affiliates of FMR totaling approximately $440.2 million and $90.1 million, respectively.
16. 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 28, |
|
June 29, |
|
June 28, |
|
June 29, |
| ||||
Numerator for basic and diluted earnings per share: |
|
|
|
|
|
|
|
|
| ||||
Net income attributable to Keurig |
|
$ |
155,151 |
|
$ |
116,272 |
|
$ |
455,462 |
|
$ |
356,276 |
|
Denominator: |
|
|
|
|
|
|
|
|
| ||||
Basic weighted-average shares outstanding |
|
162,695,801 |
|
149,825,581 |
|
155,267,136 |
|
149,307,144 |
| ||||
Effect of dilutive securities |
|
1,997,345 |
|
3,043,811 |
|
2,654,959 |
|
3,340,623 |
| ||||
Diluted weighted-average shares outstanding |
|
164,693,146 |
|
152,869,392 |
|
157,922,095 |
|
152,647,767 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Basic net income per common share |
|
$ |
0.95 |
|
$ |
0.78 |
|
$ |
2.93 |
|
$ |
2.39 |
|
Diluted net income per common share |
|
$ |
0.94 |
|
$ |
0.76 |
|
$ |
2.88 |
|
$ |
2.33 |
|
For the thirteen weeks ended June 28, 2014 and June 29, 2013, shares related to equity-based compensation of approximately 300,000 and 607,000, respectively, were excluded from the calculation of diluted earnings per share because they were antidilutive.
For the thirty-nine weeks ended June 28, 2014 and June 29, 2013, shares related to equity-based compensation of approximately 321,000 and 954,000, 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 Keurig Green Mountain, Inc. (together with its subsidiaries, the Company, Keurig, 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 in the United States and Canada. We sell Keurig® hot beverage system 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®, Vue® , and Rivo®, and Bolt portion packs (portion packs) for use with our Keurig® hot beverage system 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 portion packs including hot apple cider, hot and iced teas, iced coffees, iced fruit brews, hot cocoa and other dairy-based beverages.
Products
Portion Packs
In portion packs, we offer high-quality Arabica bean coffee including single-origin, Fair Trade Certified, Rain Forest Alliance Certified, organic, flavored, limited edition and proprietary blends. We carefully select our coffee beans and appropriately roast the coffees to optimize their taste and flavor differences. We manufacture and sell portion packs of our own brands and participating brands through licensing and manufacturing agreements. We offer brand choices such as Caribou Coffee®, Celestial Seasonings®, Dunkin Donuts, Eight OClock®, Emerils®, Folgers Gourmet Selections®, Gloria Jeans®, Kahlua® Kirkland Signature, Lavazza®, Lipton®, Millstone®, Newmans Own® Organics, Snapple®, Starbucks®, Swiss Miss®, Tetley® , Twinings of London®, and Wolfgang Puck®. We produce portion packs of tea through our own brands and have licensing agreements with companies such as Unilever North America (Lipton®), Celestial Seasonings, Inc. (Celestial Seasonings® branded teas and Perfect Iced Tea®), Good Earth® Corporation and Tetley® USA, Inc. (Good Earth® and Tetley® branded teas), R. C. Bigelow, Inc. (Bigelow® branded teas), Snapple Beverage Corp. (Snapple® branded teas), Starbucks Corporation (Tazo® and Teavana®) and Associated British Foods plc (Twinings of London®) for manufacturing, distribution, and sale of portion packs. In addition to coffee and tea, we also produce and sell portion packs for lemonade and hot apple cider under our Green Mountain Naturals brand, iced fruit brews under our Vitamin Burst brand, cocoa and other dairy-based beverages under our Café Escapes brand, as well as the Swiss Miss® brand.
Brewers and Accessories
We are a leader in sales of coffeemakers in the U.S. and Canada. As of the end of our 2013 fiscal year, we had the top four best-selling coffeemakers by dollar volume in the United States according to the NPD Group for consumer market research data in the United States. Under the Keurig® K-Cup®, Keurig® Vue®, Keurig® Bolt and co-branded Keurig® Rivo® brand names, we offer a variety of commercial and home use brewers for away-from-home (AFH) and at-home (AH) channels differentiated by features and size. In addition, we have license agreements under which licensees manufacture, market and sell coffeemakers co-branded with Keurig® Brewed. Licensees include Breville PTY Limited selling a Breville® branded brewer; Jarden Consumer Solutions selling a Mr. Coffee® branded brewer, and Conair Corporation selling a Cuisinart® branded brewer.
We offer a variety of accessories for the Keurig® Brewing platforms including K-Cup® and Vue® portion pack storage racks, baskets, and brewer carrying cases. We also sell other coffee-related equipment and accessories, gift assortments, hand-crafted items from coffee-source countries and gourmet food items covering a wide range of price points.
Other Products
We sell coffee in other package types in addition to portion packs such as bagged coffee and cans (for the grocery and mass channels) and fractional packages and ancillary products (for the office coffee and food service channels). We also earn royalties from licensees under various licensing agreements.
Over the last several years the primary growth in the coffee industry has come from the specialty coffee category, including demand for single serve coffee which can now be enjoyed in a wide variety of places, including home, office, professional, restaurants, and hospitality locations. This growth has been driven by the emergence of specialty coffee shops throughout the U.S. and Canada, 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® hot beverage system brewer adoption in order to generate ongoing demand for portion packs in American and Canadian households, food service and office locations and, in the longer term, globally. As part of this strategy, we work to sell our 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 portion 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® hot beverage brewing systems which includes both the brewer and related portion packs. In the third fiscal quarter of 2014, approximately 93% of our consolidated net sales were attributed to the combination of portion packs and Keurig® hot beverage brewers and related accessories.
We believe the primary consumer benefits delivered by our Keurig® hot beverage brewing system are as follows:
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, Keurig offers more than 290 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 portion packs.
We see these benefits as being our competitive advantage and believe its the combination of these attributes that make the Keurig® hot beverage brewing system appealing to 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 the U.S. and Canada, expanding into new geographic regions, expanding consumer choice of coffee, tea and other beverages in our existing brewing systems and through the introduction of new brewing platforms, expanding sales in adjacent beverage industry segments and/or selectively pursuing other synergistic opportunities.
The key elements of our business strategy are as follows:
· Growing the current Keurig® hot system in the U.S. and Canada;
· Expanding our brand offerings, both owned and partner brands;
· Expanding in current channels;
· Launching new brewer technologies and innovation;
· Beginning international expansion.
Growing the current Keurig® hot system in the United States and Canada. While we are positioned as a leader in the single serve hot beverage marketplace, we still have opportunities in the United States and Canada to increase household penetration. We are continuing to execute a segmentation strategy to effectively showcase our extensive variety of beverage options. We are also implementing measures to improve the shopping experience at retail to further distinguish the Keurig® brand and enhance brand recognition. Additionally, we are launching targeted marketing campaigns to increase regional household penetration in certain geographic areas through increased awareness, trial and conversion.
Expanding our brand offering. We have continued to expand consumer choice in the Keurig® hot system by entering into or extending a number of business relationships which enable us to offer other strong national and regional coffee and tea brands, and store brands such as Dunkin DonutsTM, Seattles Best Coffee®, Starbucks®, The Coffee Bean & Tea Leaf®, Cinnabon®, Krispy Kreme®, Peets Coffee & Tea, Tazo®, Eight OClock®, Market Basket®, Harris TeeterTM, Tetley®, Good Earth®, Snapple®, Kirkland SignatureTM and METROs Irresistibles K-Cup® portion packs for use with Keurig® hot beverage 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 portion packs to create additional portion pack products that will help augment consumer demand for the Keurig® hot beverage brewing systems.
As announced in February 2014, we signed a ten year agreement to collaborate on the development and introduction of the Coca-Cola Companys global brand and portfolio for use in our forthcoming Keurig ® cold beverage system. Under the collaboration arrangement, we are the Coca-Cola Companys exclusive partner for the production and sale of the Coca-Cola Company-branded single serve, pod-based cold beverages.
We believe these new product offerings fuel excitement for current Keurig® hot beverage brewer owners and users; raise system awareness; attract new consumers to the system; and promote expanded use of the system. These relationships are established with careful consideration of potential economics. We expect to continue to enter into these relationships in our efforts to expand choice and diversify our portfolio of brands with the expectation that they will lead to increased Keurig® hot beverage brewing system awareness and household adoption, in part through the participating brands advertising and merchandising activities.
Expanding in current channels. We have identified and are targeting specific opportunities within our existing channels, specifically the AFH channel, including food service, workplace, higher education and hospitality locations. These are areas where we have substantial room to grow, considering we are currently in less than one percent of food service outlets. We began addressing this opportunity by forming a partnership with the SUBWAY® restaurant chain to bring Keurig® brewers to many of the restaurant brands North American locations.
Launching new brewer technologies and innovation. We are also focused on continued innovation in both hot and cold brewing systems. Some of our recent initiatives and planned product introductions include:
· An expansion of the Keurig® hot system with the fiscal 2013 launch of the Keurig® Rivo® Cappuccino and Latte System and Rivo® portion pack espresso blend varieties, in partnership with Luigi Lavazza S.p.A. (Lavazza);
· An expansion of the Keurig® hot beverage brewing system with introduction of a new commercial grade Keurig® Bolt platform which, following in-office testing, is expected to be available throughout the U.S. and Canada in fiscal 2014;
· The planned introduction of the next generation beverage platform of the Keurig® hot beverage system, Keurig® 2.0, in late fiscal 2014, will combine new proprietary interactive technology with the qualities and technologies of our existing K-Cup® and Vue® platforms to provide consumers the ability to brew a single cup and a carafe of their favorite coffees through one machine at the touch of a button; and
· An estimated launch in fiscal 2015 of the Keurig® cold beverage system, which will deliver freshly prepared carbonated, sparkling and still beverages.
Beginning international expansion. Beginning in fiscal 2014 and continuing into fiscal 2015, we are planning to launch our Keurig® hot system global platform in targeted countries outside of North America with the introduction of a specifically designed Keurig® hot beverage brewer.
Our business relationships with participating beverage brands are generally established through licensing or manufacturing arrangements.
Under licensing arrangements, we license the right to manufacture, distribute and sell the finished beverage 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.
Management is focused on executing our growth strategy to drive Keurig® hot beverage brewer adoption in households and offices in the U.S. and Canada in order to generate ongoing demand for portion 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® portion packs expired, and certain third-parties have launched competing products in the form of established unlicensed national and regional brands and unlicensed private label portion packs.
For the third fiscal quarter of 2014, our net sales of $1,022.4 million represented growth of 6% over the third fiscal quarter of 2013 (the prior year period). Gross profit for the third fiscal quarter of fiscal 2014 was $444.6 million, or 43.5% of net sales, as compared to $407.6 million, or 42.1% of net sales for the prior year period. For the third fiscal quarter of 2014, selling, operating, and general and administrative expenses (SG&A) decreased 0.5% to $213.2 million from $214.3 million for the prior year period. As a percentage of sales, SG&A expenses decreased to 20.9% in the third fiscal quarter of 2014 from 22.2% in the prior year period. Our operating margin improved to 22.6% in the third fiscal quarter of 2014 from 20.0% 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.
We offer a one-year warranty on all Keurig® hot beverage 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® hot beverage 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 $823.8 million in cash from operating activities during the thirty-nine weeks ended June 28, 2014 as compared to $772.2 million during the thirty-nine weeks ended June 29, 2013. During fiscal 2014, we completed two sales of our common stock resulting in proceeds of $1,348.4 million, net of transaction expenses. We used cash during the thirty-nine weeks ended June 28, 2014 primarily to pay dividends of $77.7 million, fund capital expenditures of $221.9 million and repurchase shares of our common stock for $997.4 million.
We routinely analyze our short-term and long-term cash requirements to continue to grow the business. In addition to funding share repurchases and cash dividends, we expect 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 manage our operations through two operating segments, a Domestic segment including all U.S. Operations and immaterial start-up operations related to international expansion, and a Canada segment including all Canadian operations. See Note 3, 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 sustainability 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.
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 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 our 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 legal and accounting expenses related to the SEC inquiry and pending securities and stockholder derivative class action litigation because these expenses can vary from period to period 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.
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 28, |
|
June 29, |
|
June 28, |
|
June 29, |
|
Net sales |
|
100.0 |
% |
100.0 |
% |
100.0 |
% |
100.0 |
% |
Cost of sales |
|
56.5 |
% |
57.9 |
% |
61.1 |
% |
62.5 |
% |
Gross profit |
|
43.5 |
% |
42.1 |
% |
38.9 |
% |
37.5 |
% |
|
|
|
|
|
|
|
|
|
|
Selling and operating expenses |
|
12.5 |
% |
14.1 |
% |
12.0 |
% |
13.1 |
% |
General and administrative expenses |
|
8.4 |
% |
8.0 |
% |
6.5 |
% |
6.7 |
% |
Operating income |
|
22.6 |
% |
20.0 |
% |
20.5 |
%* |
17.8 |
%* |
|
|
|
|
|
|
|
|
|
|
Other income, net |
|
0.0 |
% |
0.0 |
% |
0.1 |
% |
0.0 |
% |
(Loss) gain on financial instruments, net |
|
(0.3 |
)% |
0.5 |
% |
0.1 |
% |
0.3 |
% |
Gain (loss) on foreign currency, net |
|
0.9 |
% |
(1.1 |
)% |
(0.3 |
)% |
(0.6 |
)% |
Interest expense |
|
(0.2 |
)% |
(0.4 |
)% |
(0.2 |
)% |
(0.4 |
)% |
Income before income taxes |
|
23.0 |
% |
19.0 |
% |
20.1 |
%* |
17.1 |
% |
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
(7.8 |
)% |
(7.0 |
)% |
(7.1 |
)% |
(6.3 |
)% |
Net income |
|
15.2 |
% |
12.0 |
% |
13.0 |
% |
10.8 |
% |
|
|
|
|
|
|
|
|
|
|
Net income attributable to noncontrolling interests |
|
0.0 |
% |
0.0 |
% |
0.0 |
% |
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
Net income attributable to Keurig |
|
15.2 |
% |
12.0 |
% |
13.0 |
% |
10.8 |
% |
* Does not sum due to rounding.
Segment Summary
Net sales and operating income (loss) for each of our operating segments and corporate - unallocated are summarized in the tables below:
|
|
Net sales (in millions) |
| ||||||||||
|
|
Thirteen weeks ended |
|
Thirty-nine weeks ended |
| ||||||||
|
|
June 28, |
|
June 29, |
|
June 28, |
|
June 29, |
| ||||
Domestic |
|
$ |
881.1 |
|
$ |
822.6 |
|
$ |
3,043.2 |
|
$ |
2,820.1 |
|
Canada |
|
141.3 |
|
144.5 |
|
468.9 |
|
490.8 |
| ||||
Total net sales |
|
$ |
1,022.4 |
|
$ |
967.1 |
|
$ |
3,512.1 |
|
$ |
3,310.9 |
|
|
|
Operating income (loss) (in millions) |
| ||||||||||
|
|
Thirteen weeks ended |
|
Thirty-nine weeks ended |
| ||||||||
|
|
June 28, |
|
June 29, |
|
June 28, |
|
June 29, |
| ||||
Domestic |
|
$ |
250.4 |
|
$ |
213.1 |
|
$ |
761.3 |
|
$ |
644.0 |
|
Canada |
|
24.8 |
|
23.7 |
|
77.5 |
|
69.9 |
| ||||
Corporate |
|
(43.9 |
) |
(43.5 |
) |
(120.3 |
) |
(126.0 |
) | ||||
Total operating income |
|
$ |
231.3 |
|
$ |
193.3 |
|
$ |
718.5 |
|
$ |
587.9 |
|
Thirteen weeks ended June 28, 2014 as compared to the thirteen weeks ended June 29, 2013
Revenue
Company Summary
The following table presents consolidated net sales by major product category:
|
|
Net sales (in millions) |
|
|
|
|
| |||||
|
|
Thirteen weeks ended |
|
|
|
|
| |||||
|
|
June 28, |
|
June 29, |
|
$ Increase |
|
% Increase |
| |||
Portion Packs |
|
$ |
826.3 |
|
$ |
751.7 |
|
$ |
74.6 |
|
10 |
% |
Brewers and accessories |
|
128.0 |
|
133.1 |
|
(5.1 |
) |
(4 |
)% | |||
Other products |
|
68.1 |
|
82.3 |
|
(14.2 |
) |
(17 |
)% | |||
Total net sales |
|
$ |
1,022.4 |
|
$ |
967.1 |
|
$ |
55.3 |
|
6 |
% |
Net sales for the third quarter of fiscal 2014 increased by $55.3 million, or 6%, to $1,022.4 million as compared to the prior year period. The 6% increase includes the unfavorable impact of foreign currency exchange rates which reduced net sales by approximately 1%.
The primary driver of the 6% increase in our net sales for the third quarter of fiscal 2014 as compared to the prior year period was a $74.6 million, or 10%, increase in total portion pack net sales. This was partially offset by (i) a $5.1 million, or 4%, decrease in Keurig® brewer and accessory net sales and (ii) a $14.2 million, or 17%, decrease in other product net sales.
The increase in portion pack net sales for the third quarter of fiscal 2014 as compared to the prior year period was driven by an approximate 15 percentage point increase due to volume, partially offset by (i) an approximate 3 percentage point decrease due to portion pack mix and (ii) an approximate 2 percentage point decrease due to net price realization and the impact of foreign currency exchange rates. During the third quarter of fiscal 2014, the negative mix was attributable to the fact that we sold proportionately more packs to brand owners, where there is a lower wholesale selling price, than to retailers and consumers, where there is a higher wholesale average selling price. We anticipate this decrease in net sales due to mix change to fluctuate over time, and, as we anticipate adding more brand owners, we believe this negative mix trend may continue.
The decrease in brewer and accessory net sales for the third quarter of fiscal 2014 period as compared to the prior year period was primarily driven by a $7.4 million decrease in brewer net sales, partially offset by a $2.3 million increase in accessory net sales. The decrease in brewer net sales was primarily driven by (i) a 21 percentage point decrease due to brewer net price realization, with approximately half resulting from a strategic decision to drive brewer volume to be in an appropriate inventory position ahead of the Keurig® 2.0 launch and to further expand the installed base of our Keurig® hot platform and approximately half due to a reduction to our sales return reserve in the third quarter of fiscal year 2013 which reflected lower brewer sales returns, partially offset by (i) a 13 percentage point increase due to brewer volume and (ii) a 3 percentage point increase due to brewer product mix.
Net sales of other products decreased $14.2 million, or 17%, for the third quarter of fiscal 2014 as compared to the prior year period primarily due to the continuing demand shift from traditional coffee package format to portion packs.
Domestic
Domestic segment net sales increased by $58.5 million, or 7%, to $881.1 million in the third quarter of fiscal 2014 as compared to $822.6 million in the prior year period. The increase is due primarily to a $67.7 million, or 10%, increase related to net sales of portion packs, partially offset by a $6.7 million decrease related to sales of other products.
Canada
Canada segment net sales decreased by $3.2 million, or 2%, to $141.3 million in the third quarter of fiscal 2014 as compared to $144.5 million in the prior year period. Excluding a $10.5 million, or 7%, decrease related to the unfavorable impact of foreign currency exchange rates, net sales increased by $7.3 million primarily due to a $13.1 million, or 17% increase in net sales of portion packs, which was partially offset by (i) a $1.6 million, or 11%, decrease related to net sales of Keurig® brewers and accessories, and (ii) a $4.2 million, or 8%, decrease in net 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 portion packs.
Gross Profit
Gross profit for the third quarter of fiscal 2014 was $444.6 million, or 43.5% of net sales as compared to $407.6 million, or 42.1% of net sales, in the prior year period. The increase in gross margin in the third quarter of fiscal 2014 compared to the prior year period was primarily attributable to (i) an increase of approximately 330 basis points related to a decrease in green coffee costs, and (ii) an increase of approximately 170 basis points related to logistics productivity, both of which were partially offset by (i) a decrease of approximately 140 basis points related to net price realization primarily associated with brewers, (ii) a decrease of 130 basis points related to increased portion pack packaging material costs, (iii) a decrease of approximately 80 basis points due to a change in estimate for charges related to a non-coffee purchase commitment in the comparable prior year period, and (iv) a decrease of approximately 70 basis points related to net price realization primarily associated with portion packs.
Selling, Operating, General and Administrative Expenses
SG&A expenses decreased by 0.5% to $213.2 million in the third quarter of fiscal 2014 from $214.3 million in the prior year period. SG&A expenses as a percentage of net sales decreased to 20.9% in the third quarter of fiscal 2014 from 22.2% in the prior year period. The decrease in SG&A over the prior year period is primarily attributed to a decrease in marketing expenses, partially offset by an increase in research and development and expenses related to information technology.
Segment Operating Income (Loss)
Operating income for the Domestic segment increased by $37.3 million, or 18%, for the third quarter of fiscal 2014 as compared to the prior year period which was primarily attributable to higher sales volume for portion packs and brewers as well as lower green coffee costs. Operating income for the Canada segment increased by $1.1 million, or 5%, for the third quarter of fiscal 2014 as compared to the prior year period which was primarily attributable to lower green coffee costs, partially offset by the impact of unfavorable fluctuations in foreign exchange rates. The operating loss for Corporate - Unallocated increased by $0.4 million, or 1%, for the third quarter of fiscal 2014 as compared to the prior year period.
(Loss) Gain on Financial Instruments, Net
We recorded $2.8 million in net losses on financial instruments not designated as hedges for accounting purposes during the third quarter of fiscal 2014 as compared to $4.4 million in net gains during the prior year period. The net losses and gains were both primarily attributable to our cross currency swap, which hedges the risk in currency movements on an intercompany note denominated in Canadian currency.
Gain (Loss) on Foreign Currency, Net
We have certain assets and liabilities that are denominated in Canadian currency. During the third quarter of fiscal 2014, we incurred net foreign currency gains of approximately $8.8 million as compared to net losses of $10.4 million during the prior year period. The net foreign currency gains and 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 $2.4 million in the third quarter of fiscal 2014, as compared to $3.9 million in the prior year period. The decrease in interest expense was primarily due to an increase in capitalized interest as compared to the prior year period and lower average outstanding debt in the third quarter of fiscal 2014 as compared to the average outstanding debt during the prior year period.
Income Taxes
Our effective income tax rate was 33.9% for the third quarter of fiscal 2014 as compared to a 36.6% effective tax rate for the prior year period. The decrease in the effective rate was primarily due to a $10.7 million increase related to domestic production activities deductions for the third quarter of fiscal 2014 as compared to the prior year period and a $1.8 million release of reserves for uncertain tax positions due to the expiration of the statute of limitations in the third quarter of fiscal 2014.
Net Income, Non-GAAP Net Income and Diluted Earnings Per Share (EPS)
Net income in the third quarter of fiscal 2014 was $155.2 million, an increase of $38.9 million or 33%, as compared to $116.3 million in the prior year period.
Non-GAAP net income (when excluding legal and accounting expenses related to the SEC inquiry and pending securities and stockholder derivative class action litigation as well as non-cash related items such as amortization of identifiable intangibles) increased 31% to $163.2 million for the third quarter of fiscal 2014 from $124.7 million non-GAAP net income in the prior year period.
Diluted EPS was $0.94 per share in the third quarter of fiscal 2014, as compared to $0.76 per share in the prior year period.
Non-GAAP diluted EPS was $0.99 per share in the third quarter of fiscal 2014, as compared to $0.82 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 28, 2014 and June 29, 2013 (in thousands, except per share data):
|
|
Thirteen weeks ended |
| ||||
|
|
June 28, 2014 |
|
June 29, 2013 |
| ||
Net income attributable to Keurig |
|
$ |
155,151 |
|
$ |
116,272 |
|
After tax: |
|
|
|
|
| ||
Expenses related to SEC inquiry (1) |
|
762 |
|
657 |
| ||
Amortization of identifiable intangibles (2) |
|
7,270 |
|
7,746 |
| ||
Non-GAAP net income attributable to Keurig |
|
$ |
163,183 |
|
$ |
124,675 |
|
|
|
Thirteen weeks ended |
| ||||
|
|
June 28, 2014 |
|
June 29, 2013 |
| ||
Diluted income per share |
|
$ |
0.94 |
|
$ |
0.76 |
|
After tax: |
|
|
|
|
| ||
Expenses related to SEC inquiry (1) |
|
0.00 |
|
0.00 |
| ||
Amortization of identifiable intangibles (2) |
|
0.04 |
|
0.05 |
| ||
Non-GAAP net income per share |
|
$ |
0.99 |
* |
$ |
0.82 |
* |
* Does not sum due to rounding.
(1) Represents legal and accounting expenses, net of income taxes of $0.4 million for each of the thirteen weeks ended June 28, 2014 and June 29, 2013, related to the SEC inquiry and pending securities and stockholder derivative class action litigation classified as general and administrative expense. See Note 14, 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 $3.4 million and $3.5 million for each of the thirteen weeks ended June 28, 2014 and June 29, 2013, respectively, related to our acquisitions classified as general and administrative expense. Income taxes were calculated at our deferred tax rates.
Thirty-nine weeks ended June 28, 2014 as compared to the thirty-nine weeks ended June 29, 2013
Revenue
Company Summary
The following table presents consolidated net sales by major product category:
|
|
Net Sales (in millions) |
|
|
|
|
| |||||
|
|
Thirty-nine weeks ended |
|
|
|
|
| |||||
|
|
June 28, |
|
June 29, |
|
$ Increase |
|
% Increase |
| |||
Portion Packs |
|
$ |
2,655.8 |
|
$ |
2,409.4 |
|
$ |
246.4 |
|
10 |
% |
Brewers and accessories |
|
640.7 |
|
637.2 |
|
3.5 |
|
1 |
% | |||
Other products |
|
215.6 |
|
264.3 |
|
(48.7 |
) |
(18 |
)% | |||
Total net sales |
|
$ |
3,512.1 |
|
$ |
3,310.9 |
|
$ |
201.2 |
|
6 |
% |
Net sales for the thirty-nine weeks ended June 28, 2014 (the 2014 YTD period) increased by $201.2 million, or 6%, to $3,512.1 million, as compared to $3,310.9 million reported for the thirty-nine weeks ended June 29, 2013 (the prior YTD period). The 6% increase includes the unfavorable impact of foreign currency exchange rates which reduced net sales by approximately 1%.
The primary drivers of the 6% increase in our net sales as compared to the prior YTD period were a $246.4 million, or 10%, increase in total portion pack net sales and a $3.5 million, or 1%, increase in Keurig® brewer and accessory sales, both of which were partially offset by a $48.7 million, or 18%, net decrease in other products.
The increase in portion pack net sales as compared to the prior YTD period was driven by an approximate 14 percentage point increase due to volume, partially offset by (i) an approximate 2 percentage point decrease due to net price realization and (ii) an approximate 2 percentage point decrease due to sales mix and the impact of foreign currency exchange rates. During the YTD period, the negative mix was attributable to the fact that we sold proportionately more packs to brand owners, where there is a lower wholesale selling price, than to retailers and consumers, where there is a higher wholesale average selling price. We anticipate this decrease in net sales due to mix change to fluctuate over time, and, as we anticipate adding more brand owners, we believe this negative mix trend may continue.
The increase in brewer and accessory net sales as compared to the prior YTD period was primarily driven by a $5.9 million increase in brewer net sales, partially offset by a $2.4 million decrease in accessory net sales. The increase in brewer net sales was primarily driven by a 10 percentage point increase due to brewer sales volume, partially offset by a 9 percentage point decrease due to brewer net price realization resulting from a strategic decision to drive brewer volume to be in an appropriate inventory position ahead of the Keurig® 2.0 launch and to further expand the installed base of our Keurig® hot platform.
Net sales of other products decreased $48.7 million, or 18%, as compared to the prior YTD period primarily due to the continuing demand shift from traditional coffee package format to portion packs.
Domestic
Domestic segment net sales increased by $223.1 million, or 8%, to $3,043.2 million in the 2014 YTD period as compared to $2,820.1 million in the prior YTD period. The increase is due primarily to a $221.3 million, or 10%, increase related to sales of portion packs.
Canada
Canada segment net sales decreased by $21.9 million, or 4%, to $468.9 million in the 2014 YTD period, as compared to $490.8 million in the prior YTD period. Excluding a $32.5 million, or 6%, decrease related to the unfavorable impact of foreign currency exchange rates, net sales increased by $10.6 million primarily due to a $43.6 million, or 18%, increase in net sales of portion packs, which was partially offset by (i) a $12.1 million, or 15%, decrease related to net sales of Keurig® brewers and accessories, and (ii) a $20.9 million, or 12%, decrease in net 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 portion packs.
Gross Profit
Gross profit for the 2014 YTD period was $1,366.1 million, or 38.9% of net sales, as compared to $1,241.9 million, or 37.5% of net sales, in the prior year period. The increase in gross margin as compared to the prior YTD period was primarily attributable to (i) an increase of approximately 380 basis points due to a decrease in green coffee costs and (ii) an increase of approximately 110 basis points due to logistics productivity, both of which were partially offset by (i) a decrease of approximately 100 basis points due increased portion pack packaging materials, (ii) a decrease of approximately 100 basis points due to lower net price realization primarily associated with portion packs; and (iii) a decrease of approximately 90 basis points due to lower net price realization primarily associated with brewers.
Selling, Operating, General and Administrative Expenses
SG&A expenses decreased 1% to $647.6 million in the 2014 YTD period from $654.0 million in the prior YTD period. SG&A expenses as a percentage of net sales decreased to 18.4% in the 2014 YTD period from 19.8% in the prior YTD period. The decrease in SG&A over the prior YTD period is primarily attributed to a decrease in marketing expenses, partially offset by increases in research and development and expenses related to information technology.
Segment Operating Income (Loss)
Operating income for the Domestic segment increased by $117.3 million, or 18%, as compared to the prior YTD period which was primarily attributable to higher sales volume for portion packs and brewers as well as lower green coffee costs. Operating income for the Canada segment increased by $7.6 million, or 11%, as compared to the prior YTD period which was primarily attributable to lower green coffee costs and a reduction in professional and administrative expenses, partially offset by the impact of unfavorable fluctuations in foreign exchange rates. The operating loss for Corporate - Unallocated decreased by $5.7 million, or 4.5%, as compared to the prior YTD period which was primarily attributable to a reduction in professional and consulting fees.
(Loss) Gain on Financial Instruments, Net
We recorded $4.6 million in net gains on financial instruments not designated as hedges for accounting purposes during the 2014 YTD period as compared to $9.0 million in net gains during the prior YTD period. For both the 2014 and prior YTD periods, the net gains were primarily attributable to our cross currency swap, which hedges the risk in currency movements on an intercompany note denominated in Canadian currency.
Gain (Loss) on Foreign Currency, Net
We have certain assets and liabilities that are denominated in Canadian currency. During the 2014 YTD period, we incurred a net foreign currency loss of $10.4 million as compared to a net loss of $19.2 million during the prior YTD period. The net foreign currency losses are 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.
Interest Expense
Interest expense was $8.1 million in the 2014 YTD period, as compared to $13.5 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 28, 2014 as compared to the average outstanding debt during the prior year period.
Income Taxes
Our effective income tax rate was 35.4% for the 2014 YTD period, as compared to a 36.8% effective income tax rate in the prior YTD period. The lower effective tax rate for the 2014 YTD period was due primarily to an increase related to domestic production activities deductions and the release of reserves for uncertain tax positions due to the expiration of the statute of limitations.
Net Income, Non-GAAP Net Income and Diluted Earnings Per Share (EPS)
Net income in the 2014 YTD period was $455.5 million, an increase of $99.2 million or 28%, as compared to $356.3 million in the prior YTD period.
Non-GAAP net income (when excluding legal and accounting expenses related to the SEC inquiry and pending securities and stockholder derivative class action litigation as well as non-cash related items such as amortization of identifiable intangibles) increased 26% to $479.1 million for the 2014 YTD period from $381.6 million non-GAAP net income in the prior YTD period.
Diluted EPS was $2.88 per share in the 2014 YTD period, as compared to $2.33 per share in the prior YTD period.
Non-GAAP diluted EPS was $3.03 per share in the 2014 YTD period, as compared to $2.50 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 28, 2014 and June 29, 2013 (in thousands, except per share data):
|
|
Thirty-nine weeks ended |
| ||||
|
|
June 28, 2014 |
|
June 29, 2013 |
| ||
Net income attributable to Keurig |
|
$ |
455,462 |
|
$ |
356,276 |
|
After tax: |
|
|
|
|
| ||
Expenses related to SEC inquiry (1) |
|
1,347 |
|
1,773 |
| ||
Amortization of identifiable intangibles (2) |
|
22,246 |
|
23,523 |
| ||
Non-GAAP net income attributable to Keurig |
|
$ |
479,055 |
|
$ |
381,572 |
|
|
|
Thirty-nine weeks ended |
| ||||
|
|
June 28, 2014 |
|
June 29, 2013 |
| ||
Diluted income per share |
|
$ |
2.88 |
|
$ |
2.33 |
|
After tax: |
|
|
|
|
| ||
Expenses related to SEC inquiry (1) |
|
0.01 |
|
0.01 |
| ||
Amortization of identifiable intangibles (2) |
|
0.14 |
|
0.15 |
| ||
Non-GAAP net income per share |
|
$ |
3.03 |
|
$ |
2.50 |
* |
(1) Represents legal and accounting expenses, net of income taxes of $0.8 million and $1.0 million for the thirty-nine weeks ended June 28, 2014 and June 29, 2013, respectively, related to the SEC inquiry and pending securities and stockholder derivative class action litigation classified as general and administrative expense. See Note 14, 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 $10.4 million and $10.7 million for the thirty-nine weeks ended June 28, 2014 and June 29, 2013, respectively, related to our acquisitions classified as general and administrative expense. Income taxes were calculated at our deferred tax rates.
Liquidity and Capital Resources
We have principally funded our operations, working capital needs, capital expenditures and share repurchases from net cash flows from operating activities, proceeds from sales of our common stock, borrowings under our credit facilities and capital lease and financing obligations. During fiscal 2014, we received $1,348.4 million, net of transaction-related expenses, from the issuance of 16,684,139 shares of common stock to Atlantic Industries, a wholly owned subsidiary of The Coca-Cola Company, and the issuance of 1,407,000 shares of common stock to Lavazza. At June 28, 2014, we had $273.9 million in outstanding debt and capital lease and financing obligations, $1,203.7 million in cash and cash equivalents and $1,657.0 million of working capital (including cash). At September 28, 2013, we had $251.0 million in outstanding debt and capital lease and financing obligations, $260.1 million in cash and cash equivalents and $924.4 million of working capital (including cash).
Our cash and cash equivalents total $1.2 billion and $0.3 billion as of June 28, 2014, and September 28, 2013, respectively. We actively manage our cash and cash equivalents in order to internally fund our operating needs, make scheduled interest and principal payments on our borrowings, invest in our innovation pipeline and business growth opportunities, and return cash to shareholders through common stock cash dividend payments and share repurchases.
With the exception of the repayment of intercompany debt, all earnings of our foreign subsidiaries are considered indefinitely reinvested and no U.S. deferred taxes have been provided on those earnings. If these amounts were distributed to the U.S. in the form of dividends or otherwise, we would be subject to additional U.S. income taxes, which could be material. Determination of the amount of any unrecognized deferred income tax on these earnings is not practicable because such liability, if any, is dependent on circumstances existing if and when remittance occurs.
As of June 28, 2014, we had $77.2 million of cash and cash equivalents held in international jurisdictions which will be used to fund capital and other cash requirements of international operations, primarily held by our Canadian business.
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 28, 2014 was $823.8 million as compared to $772.2 million for the prior year period. We generated $456.2 million in net income for the thirty-nine weeks ended June 28, 2014. We incurred non-cash expenses of $191.8 million primarily related to depreciation and amortization. Other significant changes in assets and liabilities affecting net cash provided by operating activities were (i) an change in income taxes receivable and income taxes payable, net providing net cash of $62.7 million, (ii) a decrease in inventories of $34.4 million and an increase in accounts payable and accrued expenses of $28.1 million.
Investing Activities:
Investing activities primarily include capital expenditures for equipment and building improvements.
Capital expenditures were $221.9 million for the thirty-nine weeks ended June 28, 2014 as compared to $190.4 million for the prior year period. Capital expenditures incurred on an accrual basis during the thirty-nine weeks ended June 28, 2014 consisted primarily of $26.7 million related to increasing packaging capabilities for Keurig® beverage platforms, $81.1 million related to facilities and related infrastructure, $48.5 million related to information technology infrastructure and systems and $100.1 million related to new product platforms. Of the $81.1 million in capital expenditures related to facilities and related infrastructure, $33.8 million relates to fixed assets acquired under capital lease and financing obligations. In fiscal 2014, we currently expect to invest between $350.0 million to $400.0 million in capital expenditures to support our future growth.
Financing Activities:
Cash provided by financing activities for the thirty-nine weeks ended June 28, 2014 totaled $347.4 million. We received $1,348.4 million, net of transaction-related expenses from the issuance of 16,684,139 shares of common stock to Atlantic Industries, a wholly owned subsidiary of The Coca-Cola Company, and the issuance of 1,407,000 shares of common stock to Lavazza. We used $997.4 million of cash to fund share repurchase activity under our existing authorized share repurchase programs and $77.7 million to pay common stock dividends during the thirty-nine weeks ended June 28, 2014.
Cash flows from operating and financing activities included a $52.7 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 and performance 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.
Long Term Debt
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 28, 2014, we had $163.7 million outstanding under the term loan A facility, no balances outstanding under the revolving credit facilities and $6.2 million in letters of credit with $993.8 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 28, 2014 and September 28, 2013 was 3.6% and 3.5%, 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 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 28, 2014, we were in compliance with these covenants. In addition, the Restated Credit Agreement contains certain mandatory prepayment requirements and customary events of default.
Interest Rate Swaps
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 28, 2014 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 28, 2014, we estimate we would have paid $4.2 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 each of the thirteen weeks ended June 28, 2014 and June 29, 2013, we incurred $0.8 million in additional interest expense pursuant to interest rate swap agreements. During each of the thirty-nine ended June 28, 2014 and June 29, 2013, we incurred $2.4 million and $2.7 million, respectively, in additional interest expense pursuant to interest rate swap agreements.
Common Stock Sales
On February 27, 2014, we sold 16,684,139 shares of common stock to Atlantic Industries, an indirect wholly owned subsidiary of The Coca-Cola Company, at $74.98 per share for an aggregate purchase price of $1,251.0 million, pursuant to a common stock purchase agreement dated February 5, 2014.
In addition, pursuant to pre-emptive rights set forth in the Common Stock Purchase Agreement (CSPA) between us and Lavazza dated August 10, 2010, we agreed not to sell or issue any shares of Common Stock for a period of five years and six months after September 28, 2010 without first offering Lavazza the opportunity to purchase an amount of newly issued securities. In accordance with the CSPA, Lavazza is entitled to maintain its current percentage ownership of our outstanding common stock as of immediately prior to the closing of any common stock issuance, on terms and conditions not less favorable than those proposed for such offering, including price. As a result of the February 27, 2014 issuance of common stock to Atlantic Industries described above, on March 28, 2014, we entered into a common stock purchase agreement with Lavazza to sell 1,407,000 shares of our common stock to Lavazza at $74.98 per share for an aggregate purchase price of $105.5 million. The transaction closed on April 17, 2014.
Share Repurchases and Dividends
Throughout various times during fiscal 2012, 2013, and 2014, our Board of Directors authorized the Company to repurchase a total of $2.5 billion of the Companys common stock. As of June 28, 2014, $1,237.9 million remained available for common stock repurchases. Additional repurchases will be made with cash on hand, cash from operations and funds available through our existing credit facility. See Note 12, Stockholders Equity, of the Notes to Unaudited Consolidated Financial Statements included in this Quarterly Report.
On February 28, 2014, we entered into an accelerated share repurchase (ASR) agreement with a major financial institution (Bank) pursuant to the 2012 and 2013 Share Repurchase Programs. The ASR allows us to buy a large number of shares immediately at a purchase price determined by an average market price over a period of time. Under the ASR, we agreed to purchase $700.0 million of our common stock, in total, with an initial delivery to us of 4,340,508 shares (Initial Shares) of our common stock by the Bank. The Initial Shares represent the number of shares at the current market price equal to 70% of the total fixed purchase price of $700.0 million. The repurchased shares were retired and returned to an unissued status. The remainder of the total purchase price of $210.0 million reflects the value of the stock held by the Bank pending final settlement and, accordingly, was recorded as a reduction to additional paid-in capital.
Final settlement of the ASR will occur no sooner than November 24, 2014 and no later than February 27, 2015 at the Banks discretion. Upon settlement of the ASR, the total shares repurchased by us will be determined based on a share price equal to the daily volume weighted-average price (VWAP) of our common stock during the term of the ASR program, less a fixed per share discount amount. At settlement, the Bank will deliver additional shares to us in the event total shares are greater than the 4,340,508 shares initially delivered, and we will issue additional shares to the Bank in the event total shares are less than the shares initially delivered. The receipt or issuance of additional shares will result in a reclassification between additional paid-in capital and common stock equal to the par value of the additional shares received or issued. The number of shares that we may be required to issue to the Bank is limited to 10.0 million shares under the ASR.
During the third quarter of fiscal 2014, we declared a quarterly dividend of $0.25 per common share, or $40.7 million in the aggregate, payable on August 1, 2014 to shareholders of record on July 3, 2014. During the thirty-nine weeks ended June 28, 2014, we paid dividends of approximately $77.7 million.
On August 4, 2014, our Board of Directors declared the next regular quarterly cash dividend of $0.25 per common share, payable on October 31, 2014, to shareholders of record as of the close of business on October 3, 2014.
No cash dividends were declared or paid in fiscal 2013.
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, fund any purchases of our common shares under the repurchase programs authorized by the Board of Directors and pay dividends. 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 |
|
Financing |
|
Purchase |
|
Total |
| |||||||
Remainder of 2014 |
|
$ |
3,164 |
|
$ |
1,451 |
|
$ |
4,339 |
|
$ |
640 |
|
$ |
369 |
|
$ |
536,985 |
|
$ |
546,948 |
|
FY 2015 - FY 2016 |
|
159,360 |
|
7,577 |
|
30,614 |
|
7,676 |
|
18,240 |
|
770,617 |
|
994,084 |
| |||||||
FY 2017 - FY 2018 |
|
903 |
|
91 |
|
18,481 |
|
7,676 |
|
19,245 |
|
550,626 |
|
597,022 |
| |||||||
Thereafter |
|
234 |
|
9 |
|
31,123 |
|
31,977 |
|
113,722 |
|
44,043 |
|
221,108 |
| |||||||
Total |
|
$ |
163,661 |
|
$ |
9,128 |
|
$ |
84,557 |
|
$ |
47,969 |
|
$ |
151,576 |
|
$ |
1,902,271 |
|
$ |
2,359,162 |
|
(1) Based on rates in effect at June 28, 2014.
(2) Includes principal and interest payments under capital lease obligations.
(3) Represents portion of the future minimum lease payments allocated to the building which will be recognized as reductions to the financing obligation and interest expense upon completion of construction.
(4) Certain purchase obligations are determined based on a contractual percentage of forecasted volumes.
In addition, we have $17.2 million in unrecognized tax benefits primarily as the result of acquisitions of which we are indemnified for $9.5 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
Information required by this Item is contained in Note 2, Recent Accounting Pronouncements, of the Notes to Unaudited Consolidated Financial Statements included within Part I of this Quarterly Report on Form 10-Q.
Factors Affecting Quarterly Performance
Our business is subject to seasonal fluctuations, including fluctuations resulting from the holiday season. As a result, total inventory, and specifically, brewers and accessories finished goods inventory is considerably higher during the last fiscal quarter than other quarters during the fiscal year, as we prepare for the holiday season. Due to the shift in product mix toward brewers and accessories in the first quarter of our fiscal year, gross margin, as a percentage of net sales, is typically lower in the first fiscal quarter than in the remainder of the fiscal year. Historically, in addition to variations resulting from the holiday season, we have experienced variations in sales from quarter-to-quarter due to a variety of other factors including, but not limited to, the cost of green coffee, competitor initiatives, marketing programs and weather. Because of the seasonality of our business, the 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 in this filing constitutes forward-looking statements. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include words such as believes, expects, anticipates, estimates, intends, plans, seeks or words of similar meaning, or future or conditional verbs, such as will, should, could, may, aims, intends, or projects. However, the absence of these words or similar expressions does not mean that a statement is not forward-looking. 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 success of introducing and producing new product offerings, 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, projections of payment of dividends, and the impact of the inquiry initiated by the SEC and any related litigation or additional governmental inquiry or enforcement proceedings, as well as litigation asserting claims against us under the federal antitrust laws and various state laws. A forward-looking statement is neither a prediction nor a guarantee of future events or circumstances, and those future events or circumstances may not occur. Management believes that these forward-looking statements are reasonable as and when made. However, caution should be taken not to place undue reliance on any such forward-looking statements because such statements speak only as of the date when made. We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In addition, forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections. These risks and uncertainties include, but are not limited to, those described in Part II Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations in our fiscal 2013 Annual Report filed on Form 10-K, as amended, and Part II, Item 1A. Risk Factors of this Quarterly Report on Form 10-Q and elsewhere in this report and those described from time to time in our future reports filed with the Securities and Exchange Commission.
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 or speculative 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 2014 |
|
2015 |
|
2016 |
|
2017 |
|
2018 |
|
Thereafter |
|
June 28, 2014 |
| |||||||
Long-term debt: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Variable rate (in thousands) |
|
$ |
3,160 |
|
$ |
18,880 |
|
$ |
9,767 |
|
$ |
79 |
|
$ |
79 |
|
$ |
20 |
|
$ |
31,985 |
|
Average interest rate |
|
1.7 |
% |
1.7 |
% |
1.7 |
% |
4.0 |
% |
4.0 |
% |
4.0 |
% |
1.7 |
% | |||||||
Fixed rate (in thousands) |
|
$ |
4 |
|
$ |
350 |
|
$ |
130,363 |
|
$ |
364 |
|
$ |
381 |
|
$ |
214 |
|
$ |
131,676 |
|
Average interest rate |
|
4.0 |
% |
4.0 |
% |
4.0 |
% |
3.9 |
% |
3.9 |
% |
3.9 |
% |
4.0 |
% |
At June 28, 2014, we had $32.0 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 $0.3 million annually. Additionally, should Canadian Bankers Acceptance Rates increase by 100 basis points over US Libor rates, we would incur additional interest expense of $0.9 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 28, 2014, 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 28, 2014, we had approximately $410.5 million in green coffee purchase commitments, of which approximately 92% 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. The effective portion of the hedges gains or losses resulting from changes in the fair value of the hedges are deferred in other comprehensive income, net of tax effects, until the hedged inventory sale is recognized in earnings, at which point the gains and losses are recognized as a cost of sales. Any ineffective portion of the hedges gains or losses are recognized in the cost of sales in the period they occur. When these commodity-based financial instruments are not classified as cash flow hedges, gain and losses are immediately recognized into cost of sales. At June 28, 2014, we held outstanding futures contracts covering 20.4 million pounds of coffee with a net fair market value of $6.4 million, gross of tax. At September 28, 2013, we held outstanding futures contracts covering 28.6 million pounds of coffee with a fair market value of $(3.8) million, gross of tax.
At June 28, 2014, we were exposed to approximately $34.8 million in un-hedged green coffee purchase commitments that do not have a fixed price as compared to $40.1 million in un-hedged green coffee purchase commitments that did not have a fixed price at September 28, 2013. A hypothetical 10% movement in the C price would increase or decrease our financial commitment for these purchase commitments outstanding at June 28, 2014 by approximately $3.5 million.
We are also subject to commodity price risk as our manufacturing and transportation costs are affected by various market factors including the availability of supplies of particular forms of energy and energy prices, as well as price risk for utilities and various manufacturing inputs which are used in our manufacturing operations. Derivative instruments have not been used to manage these risks.
Foreign Currency Exchange Rate Risk
Currently 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 9, 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 (Loss) gain 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 28, 2014, we had approximately 1.5 years remaining on a CDN $90.0 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 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 designated as fair value hedges at June 28, 2014. In addition, we use foreign currency forward contracts to hedge the purchase and payment of certain green coffee purchase commitments. We designate these contracts as cash flow hedges and measure the effectiveness at each balance sheet date. The changes in the fair value of these instruments are classified in accumulated other comprehensive income (loss). The gains or losses on these instruments are reclassified from other comprehensive income 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. At June 28, 2014, we had outstanding foreign currency forward contracts designated as cash flow hedges that had a fair value of $(0.4) million.
Movements in foreign currency exchange rates expose 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.
Our net unhedged assets (liabilities) denominated in a currency other than the functional currency were approximately $123.4 million at June 28, 2014. Based on our net un-hedged assets that are affected by movements in foreign currency exchange rates as of June 28, 2014, a hypothetical 10% movement in the foreign currency exchange rate would result in a charge or credit to earnings of approximately $12.3 million. In addition, at June 28, 2014 our net investment in our foreign subsidiaries with a functional currency different from our reporting currency was approximately $657.6 million. A hypothetical 10% movement in the foreign currency exchange rate would increase or decrease our net investment in our foreign subsidiaries by approximately $65.8 million with a corresponding charge to other comprehensive income (loss).
Item 4. Controls and Procedures
As of June 28, 2014, 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.
Information required by this Item is contained in Note 14, Legal Proceedings, of the Notes to Unaudited Consolidated Financial Statements included within Part I of this Quarterly Report on Form 10-Q.
In addition to the other information set forth in this report, you should carefully consider the following factors, which could materially affect our business, financial condition or results of operations in future periods. The risks described below are not the only risks facing our Company. Additional risks not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or results of operations in future periods.
Our financial performance is highly dependent upon the sales of Keurig® Brewing systems and portion packs.
A significant percentage of our total revenue is attributable to sales of portion packs for use with our Keurig® Brewing systems (which include all those branded Keurig® and Vue®). For the thirty-nine weeks ended June 28, 2014, total consolidated net sales of portion packs and Keurig® brewers and related accessories represented approximately 94% of consolidated net sales. Continued acceptance of Keurig® Brewing systems and sales of portion packs to an increasing installed base of brewers are significant factors in our growth plans. Any substantial or sustained decline in the sale of Keurig® Brewing systems or sales of our portion packs would materially adversely affect us. Keurig® Brewing systems compete against all sellers of coffeemakers. These companies include Bunn-O-Matic Corporation, Mars, Inc. (through its FLAVIA® unit), Conair, Inc., Hamilton Beach / Proctor-Silex, Inc., Jarden Corporation, Nestle S.A. (including the Nescafe Dolce-Gusto® beverage system), Phillips Electronics NV (including the SENSEO® brewing system, in cooperation with Sara Lee Corporation) and Robert Bosch GmbH (including the TASSIMO® beverage system, in cooperation with Kraft Foods, Inc.), Stanley Black & Decker, Inc., Starbucks Corporation (including its Verismo® brewing system), Whirlpool Corporation, as well as a number of additional brewing systems and brands. If we do not succeed in effectively differentiating ourselves from our competitors, based on technology, quality of products, desired brands or otherwise, or our competitors adopt our strategies, then our competitive position may be weakened and our sales of Keurig® Brewing systems and portion packs, and accordingly, our profitability may be materially adversely affected.
Changes in the coffee environment and retail landscape could impact our financial results.
The coffee environment is rapidly evolving as a result of, among other things, changes in consumer preferences; shifting consumer tastes and needs; changes in consumer lifestyles; and competitive product and pricing pressures. In addition, the beverage retail landscape is very dynamic and constantly evolving, not only in emerging and developing marketplaces, where modern trade is growing at a faster pace than traditional trade outlets, but also in developed marketplaces, where discounters and value stores, as well as the volume of transactions through e-commerce, are growing at a rapid pace. If we are unable to successfully adapt to the rapidly changing environment and retail landscape, our share of sales, volume growth and overall financial results could be negatively affected.
Increased competition could hurt our business.
The coffee industry is intensely competitive and we compete with respect to product, quality, convenience and price. We face significant competition in each of our channels and marketplaces. We compete with major international beverage companies that operate in multiple geographic areas, as well as numerous companies, like our Company, that are primarily local in operation. Our coffees also compete against local or regional brands as well as against private label brands developed by retailers. Our ability to gain or maintain share of sales in the global marketplace or in various local marketplaces may be limited as a result of actions by competitors. Starting in fiscal 2013, in the U.S. and Canada, certain patents associated with our current generation K-Cup® portion packs presently used in Keurig® K-Cup® brewers expired. With the patent expiry, there has been increased competition by unlicensed brands or unlicensed private label manufacturers offering new portion packs that are compatible with the Keurig® K-Cup® brewers. This increased marketplace competition could hurt our business.
Consolidation in the retail channel or the loss of key retail or grocery customers could adversely affect our financial performance.
Our industry is being affected by the trend toward consolidation in the retail channel. Larger retailers may seek lower prices from us, may demand increased marketing or promotional expenditures, and may be more likely to use their distribution networks to introduce and develop private label brands, any of which could negatively affect the Companys profitability.
In addition, our success depends in part on our ability to maintain good relationships with key retail and grocery customers. Theloss of one or more of our key customers could have an adverse effect on our financial performance. In addition, because of the competitive environment facing retailers, many of our customers have increasingly sought to improve their profitability through increased promotional programs, pricing concessions, more favorable trade terms and increased emphasis on private label products. To the extent we provide concessions or trade terms that are favorable to customers, our margins would be reduced. Further, if we are unable to continue to offer terms that are acceptable to our significant customers or our customers determine that they need fewer inventories to service consumers; these customers could reduce purchases of our products or may increase purchases of products from our competitors, which would harm our sales and profitability.
Increases in the cost of high-quality Arabica coffee beans or other commodities or decreases in the availability of high quality Arabica coffee beans or other commodities could have an adverse impact on our business and financial results.
We purchase, roast, and sell high-quality whole bean Arabica coffee and related coffee products. The price of coffee is subject to significant volatility and recently the price of coffee has been increasing, and may continue to increase significantly due to factors described below. The Arabica coffee of the quality we seek tends to trade on a negotiated basis at a premium above the C price of coffee. This premium depends upon the supply and demand at the time of purchase and the amount of the premium can vary significantly. Increases in the C coffee commodity price do increase the price of high-quality Arabica coffee and also impact our ability to enter into fixed-price purchase commitments. We frequently enter into supply contracts whereby the quality, quantity, delivery period, and other negotiated terms are agreed upon, but the date, and therefore price, at which the base C coffee commodity price component will be fixed has not yet been established. These are known as price-to-be-fixed contracts. The supply and price of coffee we purchase can also be affected by multiple factors in the producing countries, including weather, natural disasters, crop disease, general increase in farm inputs and costs of production, inventory levels and political and economic conditions, as well as the actions of certain organizations and associations that have historically attempted to influence prices of green coffee through agreements establishing export quotas or by restricting coffee supplies. Speculative trading in coffee commodities can also influence coffee prices. Because of the significance of coffee beans to our operations, combined with our ability to only partially mitigate future price risk through purchasing practices and hedging activities, increases in the cost of high-quality Arabica coffee beans could have an adverse impact on our profitability. In addition, if we are not able to purchase sufficient quantities of green coffee due to any of the above factors or to a worldwide or regional shortage, we may not be able to fulfill the demand for our coffee, which could have an adverse impact on our profitability.
Price increases may not be sufficient to offset cost increases and maintain profitability or may result in sales volume declines associated with pricing elasticity.
We may be able to pass some or all raw materials, energy and other input cost increases to customers by increasing the selling prices of our products or decreasing the size of our products; however, higher product prices or decreased product sizes may also result in a reduction in sales volume and/or consumption. If we are not able to increase our selling prices or reduce product sizes sufficiently to offset increased raw material, energy or other input costs, including packaging, direct labor, overhead and employee benefits, or if our sales volume decreases significantly, there could be a negative impact on our results of operations and financial condition.
Failure to maintain profitable, strategic relationships with well-recognized coffee brands/brand owners such as Caribou®, Dunkin Brands, Folgers®, Newmans Own® Organics and Starbucks® could adversely impact our future growth and business.
We have entered into strategic relationships for the manufacturing, distribution, and sale of portion pack products with well-regarded coffee companies such as Caribou, Dunkin Brands, The J.M. Smucker Company, Newmans Own® Organics, and Starbucks. As independent companies, our strategic partners, some of which are publicly traded companies, make their own business decisions that may not always align with our interests. In addition, many of our strategic partners have the right to manufacture or distribute their own specialty beverage products. If we are unable to provide an appropriate mix of incentives to our strategic partners through a combination of pricing and marketing and advertising support, or if our strategic partners are not satisfied with our brand innovation and development efforts, they may take actions that could adversely impact our overall future profitability and growth, awareness of our Keurig® Brewing systems, and our ability to attract new consumers to the Keurig® Brewing system.
If we are not able to achieve our overall long-term goals, the value of an investment in our Company could be negatively affected.
We have established and publicly announced certain long-term growth objectives. These objectives were based on our evaluation of our growth prospects, which are generally driven by volume and sales potential of many product types, some of which are more profitable than others, and on an assessment of the potential price and product mix. There can be no assurance that we will achieve the required volume or revenue growth or the mix of products necessary to achieve our long-term growth objectives.
Continued innovation and the successful development and timely launch of new products and product extensions are critical to our financial results and achievement of our growth strategy.
Achievement of our growth strategy is dependent, among other things, on our ability to extend the product offerings of our existing brands and introduce innovative new products. Although we devote significant focus to the development of new products, we may not be successful in developing innovative new products or our new products may not be commercially successful. Additionally, our new product introductions are often time sensitive, and thus failure to deliver innovations on schedule could be detrimental to our ability to successfully launch such new products, in addition to potentially harming our reputation and customer loyalty. Our financial results and our ability to maintain or improve our competitive position will depend on our ability to effectively gauge the direction of our key marketplaces and successfully identify, develop, manufacture, market and sell new or improved products in these changing marketplaces.
If we are unable to expand our operations in new countries, our long-term growth rate could be negatively affected.
Our success depends in part on our ability to grow our business in new countries, which in turn depends on economic and political conditions in those countries, our ability to establish operations in those countries or to form strategic business partnerships and to make necessary infrastructure enhancements to production facilities, distribution networks, order processing and fulfillment systems and technology. Moreover, the supply of our products in new marketplaces must match consumers demand for those products. Due to product price, limited purchasing power and cultural differences, there can be no assurance that our existing products will be accepted in any particular new country or that we will be able to develop new products that will be successful in any particular new country.
Obsolete inventory may result in reduced prices or write-downs.
We must manage our inventory of brewers effectively. As we innovate and introduce new brewers to the marketplace, our existing brewers are at an increased risk of inventory obsolescence. If we ultimately determine that we have excess brewers, we may have to reduce our prices and write-down inventory which could have an adverse effect on our business, financial condition, and results of operations. Conversely, if new brewers launches are delayed, we may have insufficient existing brewer inventory to meet our customer demand which could result in lost revenue opportunities and have an adverse impact on our financial results.
If we are not able to build and sustain proper information technology infrastructure or successfully implement our business transformation initiative, our business could suffer.
We depend on information technology to improve the effectiveness of our operations, to interface with our customers, to maintain financial accuracy and efficiency, to comply with regulatory financial reporting, legal and tax requirements, and for digital marketing activities and electronic communication among our locations and between our personnel and the personnel of our contract manufacturers, suppliers or other third-party partners. If we do not allocate and effectively manage the resources necessary to build and sustain the proper information technology infrastructure, we could be subject to transaction errors, processing inefficiencies, the loss of customers, business disruptions, the loss of or damage to intellectual property, or the loss of sensitive or confidential data through security breach or otherwise.
Beginning in fiscal 2013, we embarked on a multi-year business transformation initiative to streamline business processes and migrate certain of our financial processing systems to an enterprise-wide system solution. There can be no certainty that this initiative will deliver the expected benefits. The failure to deliver our goals may impact our ability to process transactions accurately and efficiently and remain in step with changing business needs, which could result in the loss of customers. In addition, the failure to either deliver the applications on time, or anticipate the necessary readiness and training needs, could lead to business disruption and loss of customers and revenue.
Damage to our reputation or brand name, loss of brand relevance, product recalls, product liability, sales returns and warranty expense could negatively impact us.
We believe our success depends on our ability to maintain consumer confidence in the safety and quality of our products. Our success also depends on our ability to maintain the brand image of our existing products, build up brand image for new products and brand extensions, and maintain our corporate reputation. We cannot assure you, however, that our commitment to product safety and quality and our continuing investment in advertising and marketing will have the desired impact on our products brand image and on consumer preferences. Product safety or quality issues, actual or perceived, or allegations of product contamination, even when false or unfounded, could tarnish the image of the affected brands and may cause consumers to choose other products. Allegations of product safety or quality issues or contamination, even if untrue, may require us from time to time to recall a beverage or other product from all of the channels in which the affected production was distributed. Such issues or recalls could negatively affect our profitability and brand image.
Failure to meet expectations for our financial performance will likely adversely affect the price and volatility of our stock.
Failure to meet expectations, particularly with respect to operating margins, earnings per share, operating cash flows, and net revenues, will likely result in a decline and/or increased volatility in the price of our stock. In addition, price and volume fluctuations in the stock market as a whole may affect the price of our stock in ways that may be unrelated to our financial performance.
We rely on certain single companies for certain strategic material, product manufacturing and order fulfillment, so a significant disruption in the operation of any of these companies to produce for us could materially adversely affect us.
We have single suppliers for certain strategic raw materials critical for the manufacture of portion packs and the processing of certain key ingredients in our portion packs. In addition, a single company manufactures the vast majority of our brewers. We have begun to look for additional suppliers for these strategic raw materials and ingredient processing, and have begun to expand our brewer manufacturing footprint, having recently qualified manufacturers in Malaysia and China. However, in the meantime, any disruption in operation of these companies to produce for us, whether as a result of a natural disaster or other causes, could significantly impair our ability to meet demand for our products.
In addition, we rely primarily on one order fulfillment entity, M.Block & Sons, Inc. (MBlock), to process the majority of orders sold through to retailers, department stores and mass merchants in the United States. See Note 2, Significant Accounting Policies-Revenue Recognition of the Notes to Consolidated Financial Statements included our fiscal 2013 Annual Report filed on Form 10-K, as amended, for the Companys revenue recognition policy on how we recognize revenue on orders processed through fulfillment entities. The inability of MBlock to perform its obligations to us, whether due to deterioration in its financial condition, integrity or failure of its business systems or otherwise, could result in significant losses that could materially adversely affect us. If our relationship with MBlock is terminated, we can provide no assurance that we would be able to contract with another third-party to provide these services to us in a timely manner or on favorable terms or that we would be able to internalize the related services effectively or in a timely manner.
Our long-term purchase commitments for certain strategic raw materials critical for the manufacture of portion packs could impair our ability to be flexible in our business without penalty.
In order to ensure a continuous supply of high quality raw materials some of our inventory purchase obligations include long-term purchase commitments for certain strategic raw materials critical for the manufacture of portion packs. The timing of these may not always coincide with the period in which we need the supplies to fulfill customer demand. This could lead to higher and more variable inventory levels and/or higher raw material costs.
We rely on independent certification for a number of our products. Loss of certification within our supply chain or as related to our manufacturing processes could harm our business.
We rely on independent certification, such as certifications of our products as organic or Fair Trade, to differentiate some of our products from others, such as the Newmans Own® Organics product line, Green Mountain Coffee® Fair Trade Certified coffee line and the Canada segments Fair Trade Organic Collection. In fiscal 2013, approximately 31% of our coffee purchases were from certified sources. We must comply with the requirements of independent organizations or certification authorities in order to label our products as certified. The loss of any independent certifications could adversely affect our marketplace position, which could harm our business.
Due to the seasonality of many of our products and other factors such as adverse weather conditions, our operating results are subject to fluctuations.
Historically, we have experienced increased sales of our Keurig® Brewing systems in our first fiscal quarter due to the holiday season. 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. The impact on sales volume and operating results due to the timing and extent of these factors can significantly impact our business. For these reasons, quarterly operating results should not be relied upon as indications of our future performance.
The sales of our products are influenced to some extent by weather conditions in the geographies in which we operate. Unusually warm weather during the winter months may have a temporary decrease on the demand for some of our products and contribute to lower sales, which could have an adverse effect on our results of operations for such periods.
Our failure to accurately forecast customer demand for our products, or to quickly adjust to forecast changes, could adversely affect our business and financial results.
There is inherent risk in forecasting demand due to the uncertainties involved in assessing the current level of maturity of the single serve component of our business. We set target levels for the manufacture of brewers and portion packs and for the purchase of green coffee in advance of customer orders based upon our forecasts of customer demand.
If our forecasts exceed demand, we could experience excess inventory in the short-term, excess manufacturing capacity in the short and long-term, and/or price decreases, all of which could impact our financial performance. Alternatively, if demand exceeds our forecasts significantly beyond our current manufacturing capacity, we may not be able to satisfy customer demand, which could result in a loss of share if our competitors are able to meet customer demands. A failure to accurately predict the level of demand for our products could adversely affect our net revenues and net income.
Increases or changes in income or indirect tax rates could have a material adverse impact on our financial results.
We are subject to income tax in the United States and Canada in which we generate net operating revenues. As we expand geographically, we may become subject to income tax and other taxes in additional jurisdictions. Increases in income tax rates could reduce our after-tax income from affected jurisdictions. In addition, our business operations are subject to numerous duties or taxes that are not based on income, sometimes referred to as indirect taxes, including import duties, excise taxes, sales or value-added taxes, property taxes and payroll taxes, in many of the jurisdictions in which we operate, including indirect taxes imposed by state and local governments. Increases in or the imposition of new indirect taxes on our business operations or products would increase the cost of products or, to the extent levied directly on consumers, make our products less affordable, which may negatively impact our net operating revenues.
Exposure to foreign currency risk and related hedging activities may result in significant losses and fluctuations to our periodic income statements.
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.
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. 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. 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. In addition, we 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.
As we expand geographically, we expect to have increasing foreign currency risk associated with cash flows from foreign subsidiaries, foreign currency purchase commitments, and foreign currency intercompany debt. However, there can be no assurance that these contracts will effectively protect us from fluctuations in foreign currency exchange rates, and we may incur material losses from such hedging transactions.
A significant interruption in the operation of our roasting, manufacturing or distribution capabilities or disruption of our supply chain could have an adverse effect on our business, financial condition and results of operations.
Our ability to make, distribute and sell products is critical to our success. We currently roast and manufacture our coffee and other beverage products in the United States in Vermont, Tennessee, Washington, Virginia and California and in Canada in Quebec. We expect to be able to meet current and forecasted demand for the near term. However, if demand increases more than we currently forecast, we will need to either expand our current capabilities internally or acquire additional capacity and the failure to do so in a timely or cost effective manner could have a negative impact on our business. Damage or disruption to our manufacturing or distribution capabilities could adversely affect our business, financial condition and results of operations.
If we are unable to protect our information systems against service interruption or failure, misappropriation of data or breaches of security, our operations could be disrupted, we could be subject to costly government enforcement actions and private litigation and our reputation may be damaged.
Our businesses involve the collection, storage and transmission of users personal information. Our efforts to protect such information may be unsuccessful due to the actions of third parties, computer viruses, physical or electronic break-ins, catastrophic events, employee error or malfeasance or other attempts to harm our systems. Because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems, change frequently and often are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures in time. We could also experience a loss of critical data and delays or interruptions in our ability to manage inventories or process transactions. Some of our commercial partners, such as those that help us deliver our website, may receive or store information provided by us or our users through our websites. If these third parties fail to adopt or adhere to adequate information security practices, or fail to comply with our online policies, or in the event of a breach of their networks, our users data may be improperly accessed, used or disclosed.
If our systems are harmed or fail to function properly, we may need to expend significant financial resources to repair or replace systems or to otherwise protect against security breaches or to address problems caused by breaches. If we experience a significant security breach or fail to detect and appropriately respond to a significant security breach, we could be exposed to costly legal or regulatory actions against us in connection with such incidents, which could result in orders or consent decrees forcing us to modify our business practices. Any incidents involving unauthorized access to or improper use of user information, or incidents that are a violation of our online privacy policy, could harm our brand reputation and diminish our competitive position. Any of these events could have a material and adverse effect on our business, reputation or financial results. Our insurance policies carry coverage limits, which may not be adequate to reimburse us for losses caused by security breaches.
Our intellectual property may not be valid, enforceable, or commercially valuable.
While we make efforts to develop and protect our intellectual property, the validity, enforceability and commercial value of our intellectual property rights may be reduced or eliminated by the discovery of prior inventions by third-parties, the discovery of similar marks previously used by third-parties, the successful independent development by third-parties of the same or similar confidential or proprietary innovations or changes in the supply or distribution chains that render our rights obsolete.
We rely on trademark, trade secret, patent and copyright laws to protect our intellectual property rights. We cannot be sure that these intellectual property rights will be maximized or that they can be successfully asserted. There is a risk that we will not be able to obtain and perfect our own or, where appropriate, license intellectual property rights necessary to support new product introductions. We cannot be sure that these rights, if obtained, will not be invalidated, circumvented or challenged in the future. In addition, even if such rights are obtained in the United States, the laws of some of the other countries in which our products are or may be sold do not protect our intellectual property rights to the same extent as the laws of the United States. Our failure to perfect or successfully assert our intellectual property rights could make us less competitive and could have an adverse effect on our business, operating results and financial condition.
Laws and regulations could adversely affect our business.
Our products are extensively regulated in the United States and Canada, and, as we expand geographically, will become subject to the laws and regulations of additional jurisdictions. Our products are subject to numerous food safety and other laws and regulations relating to the sourcing, manufacturing, storing, marketing, advertising, and distributing of these products. Other laws and regulations relate to labeling requirements, the environment, relations with distributors and retailers, employment, health and safety and trade practices. Enforcement of existing laws and regulations, changes in legal requirements, and/or evolving interpretations of existing regulatory requirements, may result in increased compliance costs and create other obligations, financial or otherwise, that could adversely affect our business, financial condition or operating results.
Significant additional labeling or warning requirements or limitations on the availability of our products may inhibit sales of affected products.
Various jurisdictions may seek to adopt significant additional product labeling or warning requirements or limitations on the availability of our products relating to the content or perceived adverse health consequences of certain of our products. If these types of requirements become applicable to one or more of our major products under current or future environmental or health laws or regulations, they may inhibit sales of such products. One such law, which is in effect in California and is known as Proposition 65, requires that a warning appear on any product sold in California that contains a substance that, in the view of the state, causes cancer or birth defects. The state maintains lists of these substances and periodically adds other substances to these lists. Proposition 65 exposes all food and beverage producers to the possibility of having to provide warnings on their products in California because it does not provide for any generally applicable quantitative threshold below which the presence of a listed substance is exempt from the warning requirement. Consequently, the detection of even a trace amount of a listed substance can subject an affected product to the requirement of a warning label. However, Proposition 65 does not require a warning if the manufacturer of a product can demonstrate that the use of the product in question exposes consumers to a daily quantity of a listed substance that is below a safe harbor threshold that may be established, is naturally occurring, is the result of necessary cooking, or is subject to another applicable exception. One or more substances that are currently on the Proposition 65 lists, or that may be added to the lists in the future, can be detected in Company products at low levels that are safe. With respect to substances that have not yet been listed under Proposition 65, the Company takes the position that listing is not scientifically justified. With respect to substances that are already listed, the Company takes the position that the presence of each such substance in Company products is subject to an applicable exemption from the warning requirement. The State of California or other parties, however, may take a contrary position. If we were required to add Proposition 65 warnings on the labels of one or more of our beverage products produced for sale in California, the resulting consumer reaction to the warnings and possible adverse publicity could negatively affect our sales both in California and in other marketplaces.
We face risks related to the ongoing SEC inquiry.
As previously disclosed, the staff of the SECs Division of Enforcement informed us that it was conducting an informal inquiry into matters at the Company. At the direction of the Audit and Finance Committee of our Board of Directors, we are cooperating fully with the SEC staffs inquiry. At this point, we are unable to predict what, if any, consequences the SEC inquiry may have on us. However, the inquiry may continue to result in considerable legal expenses, divert managements attention from other business concerns and harm our business. If the SEC were to commence legal action, we could be required to pay significant penalties and/or other amounts and could become subject to injunctions, an administrative cease and desist order, and/or other equitable remedies. The resolution of the SEC inquiry could require the filing of additional restatements of our prior financial statements, and/or our restated financial statements, or require that we take other actions not presently contemplated. We can provide no assurances as to the outcome of the SEC inquiry.
Litigation pending against us could materially impact our business and results of operations.
We are currently party to various legal and other proceedings. In particular, numerous putative class actions and stockholder derivative actions have been filed against us in response to our disclosures in the Current Reports on Forms 8-K dated September 28, 2010 and November 15, 2010. In addition, two individual and numerous class actions have been filed against us asserting claims under the federal antitrust laws and various state laws, claiming that the Company has monopolized alleged markets for single serve coffee brewers and single serve coffee portion packs, including through its contracts with suppliers and distributors and in connection with the launch of our next generation hot brewing system, Keurig® 2.0 and seeking to block the launch of Keurig® 2.0. See Note 14, Legal Proceedings, of the Notes to Unaudited Consolidated Financial Statements included within Part I of this Quarterly Report on Form 10-Q. These matters may involve substantial expense and operational disruption to us, which could have a material adverse impact on our financial position and our results of operations. We can provide no assurances as to the outcome of any litigation.
Adverse changes in global and domestic economic conditions or a worsening of the United States economy could materially adversely affect us.
For the thirty-nine weeks ended June 28, 2014, our net sales in the United States were approximately $3.0 billion, or 87% of our total net sales. Our sales and performance depend significantly on consumer confidence and discretionary spending, which are still under pressure from United States and global economic conditions. Unfavorable general economic conditions, such as a worsening of the economic downturn and/or decrease in consumer spending in the United States may adversely impact our sales, reduce our profitability and could negatively affect our overall financial performance.
We also have exposure to various financial institutions under coffee hedging arrangements and interest rate swaps, and the risk of counterparty default.
Climate change may have a long-term adverse impact on our business and results of operations.
There is increasing concern that a gradual increase in global average temperatures due to increased concentration of carbon dioxide and other greenhouse gases in the atmosphere will cause significant changes in weather patterns around the globe and an increase in the frequency and severity of natural disasters. Decreased agricultural productivity in certain regions of the world as a result of changing weather patterns may limit availability or increase the cost of key agricultural commodities, such as coffee and tea, which are important sources of ingredients for our products, and could impact the food security of communities around the world. Increased frequency or duration of extreme weather conditions could also impair production capabilities, disrupt our supply chain or impact demand for our products. As a result, the effects of climate change could have a long-term adverse impact on our business and results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
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Approximate |
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March 30, 2014 to April 26, 2014 |
|
661,900 |
|
$ |
100.68 |
|
661,900 |
|
$ |
287,795 |
|
April 27, 2014 to May 24, 2014 |
|
|
|
|
|
|
|
1,287,795 |
| ||
May 25, 2014 to June 28, 2014 |
|
427,085 |
|
116.91 |
|
427,085 |
|
1,237,865 |
| ||
Total |
|
1,088,985 |
|
107.04 |
|
1,088,985 |
|
|
| ||
(1)Monthly information corresponds to our fiscal months during the third quarter of fiscal 2014.
(2)All shares purchased during the period were made as part of plans approved by the Board of Directors in November 2013, to purchase up to $1.0 billion in Company shares, and in May 2014 to purchase up to an additional $1.0 billion in Company shares.
See Note 12, Stockholders Equity, of the Notes to Unaudited Consolidated Financial Statements included in this Quarterly Report.
(a) Exhibits:
10.1 Second Amendment to the Keurig Green Mountain, Inc. 2002 Deferred Compensation Plan.*
10.2 Amendment to Consulting Agreement between Keurig Green Mountain, Inc. and Robert P. Stiller, dated June 14, 2014.*
31.1 Principal Executive Officer Certification Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as Adopted Pursuant to the Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Principal Financial Officer Certification Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as Adopted Pursuant to the Section 302 of the Sarbanes-Oxley Act of 2002.
32 Principal Executive Officer and Financial Officer Certifications Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101 The following financial statements from the Companys Quarterly Report on Form 10-Q for the fiscal quarter ended June 28, 2014 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.
* Management contract or compensatory plan.
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.
KEURIG GREEN MOUNTAIN, INC.
Date: 8/6/2014 |
By: |
/s/ Brian P. Kelley |
|
|
Brian P. Kelley, |
|
|
President and Chief Executive Officer |
|
|
|
Date: 8/6/2014 |
By |
/s/ Frances G. Rathke |
|
|
Frances G. Rathke, |
|
|
Chief Financial Officer and Treasurer |
Exhibit 10.1
SECOND AMENDMENT TO
KEURIG GREEN MOUNTAIN, INC.
2002 DEFERRED COMPENSATION PLAN
This SECOND AMENDMENT TO KEURIG GREEN MOUNTAIN, INC.S 2002 DEFERRED COMPENSATION PLAN (the Second Amendment) is entered into as of the 19th day of June, 2014 by Keurig Green Mountain, Inc., a Delaware corporation (the Company).
WHEREAS, the Company (formerly Green Mountain Coffee Roasters, Inc.) amended and restated, effective December 13, 2007, the Companys 2002 Deferred Compensation Plan (the Plan);
WHEREAS, on March 6, 2014, the Compensation and Organizational Development Committee of the Board of Directors (the Committee) amended the Plan to replace the name Green Mountain Coffee Roasters, Inc. with Keurig Green Mountain, Inc. (the First Amendment); and
WHEREAS, at a meeting of the Committee held on June 19, 2014, the Committee approved an amendment to the Plan to revise the definition of Change in Control to be consistent with the Company 2008 Change-in-Control Severance Benefit Plan, as amended, and to make certain other amendments relating to procedures under the Plan as set forth more fully in this Second Amendment.
NOW, THEREFORE, in order to implement the changes to the Plan as approved by the Committee, the Company hereby amends the Plan as follows:
1. Section 2, the definition of Change in Control is hereby amended and restated effective as of the date hereof (except that the provisions of subsection (d) shall be deemed to have been in effect at all times from and after December 12, 2002), to read in its entirety as follows:
Change in Control: Subject to (d) below, A Change in Control shall be deemed to have occurred upon the occurrence of (a), (b) or (c) below:
(a) any Person (excluding (i) any employee benefit plan of the Company or its subsidiaries and any person or entity acting in its capacity as trustee, agent or other fiduciary or administrator of any such plan and (ii) Robert Stiller, members of his family and trusts for their benefit) become(s) the beneficial owner (as defined in Rules 13d-3 and 13d-5 under the Securities Exchange Act of 1934, as amended (the Exchange Act), except that a person or group shall be deemed to have beneficial ownership of all securities that such person or group has the right to acquire, whether such right is exercisable immediately or only after the passage of time (such right, an option right)), directly or indirectly, of 35% or more of the equity securities of the Company entitled to vote for members of the Board on a fully-diluted basis (and taking into account all such securities that such person or group (as such terms are used in Sections 13(d) or 14(d) of the Exchange Act) (Person) has the right to acquire pursuant to any option right); provided, that if a Person (subject to the exclusions set forth in (a)(i) and (a)(ii) above) becomes the beneficial owner (as defined above) of 35% or more but less than 50% of the equity securities of the Company entitled to vote for members of the Board on a fully-diluted basis (and taking into account all such securities that such Person has the right to acquire pursuant to any option right), no Change in Control shall be deemed to have occurred by reason thereof under this paragraph (a) if within fifteen (15) days of being advised that such ownership level has been reached, a majority of the Incumbent Directors then in office adopt a resolution approving the acquisition of that level of securities ownership by such Person. As used herein, Incumbent Directors means the individuals who, as of June 19, 2014, constituted the Board; provided, that any individual who becomes a member of the Board subsequent to June 19, 2014 and whose election or nomination for election was approved by a vote of at least two-thirds of the Incumbent Directors shall be treated as an Incumbent Director unless he or she assumed office as a result of an actual or threatened election contest with respect to the election or removal of directors;
(b) there is consummated a reorganization, merger or consolidation involving the Company, or a sale or other disposition of all or substantially all of the assets of the Company (such event, a Business Combination) unless, following such Business Combination, (i) the Persons who were the beneficial owners (as defined in paragraph (a)) of the equity securities of the Company entitled to vote for members of the Board beneficially own (as so defined), directly or indirectly, more than 50% of the equity securities entitled to vote generally in the election of directors (or the equivalent) of the entity resulting from such Business Combination in substantially the same proportions as their ownership immediately prior to such Business Combination of the equity securities of the Company entitled to vote for members of the Board, (ii) no Person (excluding any entity resulting from such Business Combination or any entity or individual described in (a)(i) or (a)(ii) or that would be so described if the resulting entity were substituted for the Company and its subsidiaries in (a)(i)) beneficially owns, directly or indirectly, 35% or more of the equity securities entitled to vote generally in the election of directors (or the equivalent) of the entity resulting from such Business Combination, except to the extent that such ownership existed prior to the Business Combination, and (iii) at least a majority of the members of the board of directors (or the equivalent) resulting from such Business Combination were Incumbent Directors at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or
(c) the stockholders of the Company approve a complete liquidation or dissolution of the Company.
(d) Notwithstanding the foregoing and any other provision of the Plan (including any provision of the Plan as originally in effect or as subsequently amended or restated), no CIC shall be deemed to have occurred prior to June 19, 2014.
2. Section 4.3(a) is hereby amended and restated to read in its entirety as follows:
Notwithstanding Sections 4.1 and 4.2 above but subject to Section 4.3(c) below, an Eligible Person may irrevocably elect at the time of deferral to have a portion or all of the amount so deferred credited as Stock Units. The Administrator shall use the last sale price for the Common Stock reported on the Nasdaq National Market (or, if the Common Stock is then principally traded on another exchange, the closing price on such exchange), with respect to Eligible Pay in the form of cash, as reported for the last trading day of the month in which the Eligible Pay would otherwise have been paid and, with respect to Eligible Pay in the form of a stock unit grant, the date of such stock unit grant. Any portion of a Participants Account denominated in Stock Units pursuant to this Section 4.3(a): (i) shall be increased, in the event any cash dividend is declared with respect to the Common Stock while such portion of the Account remains unpaid, by additional Stock Units equal in number to the number of shares of Common Stock in which such dividend (had it been payable with respect to Stock Units on the same basis as with respect to shares of Common Stock) could have been reinvested on the dividend payment date, using the last sale price for the Common Stock reported on the Nasdaq National Market (or, if the Common Stock is then principally traded on another exchange, the closing price on such exchange) for the payment date (any such Stock Units, the Dividend Stock Units), and (ii) shall be payable only in shares of Common Stock, with one share of Common Stock payable for each Stock Unit; provided, that in the event of a Change in Control any portion of a Participants Account then denominated in Stock Units shall (A) as of the date of the Change in Control, be notionally re-invested (assuming a per-share value equal to the per-share value of the Common Stock immediately prior to the Change in Control) in one or more other Earnings Measures specified by, or elected in accordance with rules prescribed by, the Administrator, and (B) when payable thereafter in accordance with the provisions of Section 5 shall be payable in cash.
3. Section 5.1 is hereby amended and restated in its entirety to read as follows:
Time of Distribution. At the time of a Participants deferral election under Section 3 above and subject to the remaining provisions of this Section 5, the Participant may elect to receive all or any portion of the amount then being deferred, adjusted for notional earnings as described at Section 4 above, in a single lump sum at or within thirty (30) days following, or in installments commencing at or within thirty (30) days following, a fixed date specified in such election (a fixed-term deferral); provided, that if the Participant Separates from Service prior to the date so specified, any amounts subject to the fixed-term deferral then remaining to the Participants Account shall be distributed in a single lump sum on the Earliest Post-Separation Payment Date following the Participants Separation from Service; and further provided, that if the Participant makes no fixed-term designation at the time of his or her deferral election under Section 3 above, the amount so deferred, adjusted for notional earnings as described at Section 4 above, shall be paid in a single lump sum on the Earliest Post-Separation Payment Date following the Participants Separation from Service; and further provided, that in the absence of a written election to the contrary that complies with Section 409A, any Dividend Stock Units in the Participants Account shall be distributed at the same time and in the same form as the Stock Units to which they relate.
4. In all other respects, the Plan is hereby confirmed and ratified in its entirety.
|
KEURIG GREEN MOUNTAIN, INC. |
|
|
|
|
|
/s/ Michael J. Degnan |
|
Michael J. Degnan |
|
Chief Legal Officer, Corporate General Counsel and Corporate Secretary |
Exhibit 10.2
|
CONFIDENTIAL |
Keurig Green Mountain, Inc.
33 Coffee Lane
Waterbury VT 05676
June 14, 2014
Robert P. Stiller
11 Via Vizcaya
Palm Beach, FL 33480
Dear Mr. Stiller:
This letter (this Amendment Letter) confirms the agreement between you and Keurig Green Mountain, Inc. (the Company) concerning extending your engagement to provide advisory services to the Company as Chairman Emeritus as originally set forth in the letter agreement between you and the Company (formerly Green Mountain Coffee Roasters, Inc.) dated June 19, 2013 (the Original Agreement), and to make such other modifications to the Original Agreement as set forth herein. Defined terms used herein but not otherwise defined shall have the meanings ascribed to them in the Original Agreement.
1. The last sentence of the paragraph titled Relationship of Parties is hereby amended and restated in its entirety to read as follows:
Your services hereunder, if and when provided, however, shall be deemed Employment and/or service (including as service for the Board of Directors), as applicable, for purposes of the Companys 2006 Incentive Plan and any awards granted thereunder.
2. The first sentence of the paragraph titled Term and Termination is hereby amended and restated in its entirety to read as follows:
This Agreement shall commence on the date hereof (the Effective Date) and, unless otherwise agreed by the parties, terminate on June 19, 2015.
If the terms of this Letter Amendment are acceptable to you, please sign, date and return it to me no later than June 19, 2014. The enclosed copy of this letter, which you should also sign and date, is for your records.
At the time you sign and return it, this Letter Amendment shall take effect as a legally-binding agreement between you and the Company. Except for the changes expressly made by this Letter Amendment to the Original Agreement, the Original Agreement remains in full force and effect without modification. All references to the Original Agreement mean the Original Agreement as amended hereby. This Letter Amendment may be executed in any number of counterparts, including by facsimile and .PDF, and each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument.
We thank you for the advisory services that you have provided to date, and look forward to continuing to work together.
|
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Sincerely, | |
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| |
|
|
KEURIG GREEN MOUNTAIN, INC. | |
|
|
| |
|
|
| |
|
|
By: |
/s/ Brian P. Kelley |
|
|
|
Brian P. Kelley |
|
|
|
President and Chief Executive Officer |
|
|
| |
|
|
| |
ACCEPTED AND AGREED: |
|
| |
|
|
| |
|
|
| |
/s/ Robert P. Stiller |
|
| |
Robert P. Stiller |
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| |
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| |
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| |
Date: June 14, 2014 |
|
|
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, President and Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Keurig Green Mountain, 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 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 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 6, 2014 |
|
|
|
|
|
/s/ Brian P. Kelley |
|
Brian P. Kelley |
|
President and Chief Executive Officer |
|
Exhibit 31.2
CERTIFICATION PURSUANT TO
SECURITIES EXCHANGE ACT RULES 13a-14 and 15d-14
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Frances G. Rathke, Chief Financial Officer and Treasurer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Keurig Green Mountain, 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 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 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 6, 2014 |
|
|
|
|
|
/s/Frances G. Rathke |
|
Frances G. Rathke |
|
Chief Financial Officer and Treasurer |
|
Exhibit 32
CERTIFICATIONS OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
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 Keurig Green Mountain, Inc. (the Company) on Form 10-Q for the period ending June 28, 2014 as filed with the Securities and Exchange Commission on the date hereof (the Report), each of the undersigned officers of the Company certifies 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 such officers 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 results of operations of the Company.
Date: August 6, 2014 |
|
|
|
|
|
/s/ Brian P. Kelley |
|
Brian P. Kelley |
|
President and Chief Executive Officer |
|
|
|
|
|
Date: August 6, 2014 |
|
|
|
|
|
/s/ Frances G. Rathke |
|
Frances G. Rathke |
|
Chief Financial Officer and Treasurer |
|
Fixed Assets (Details) (USD $)
|
3 Months Ended | 9 Months Ended | 3 Months Ended | 3 Months Ended | 3 Months Ended | 3 Months Ended | 3 Months Ended | 3 Months Ended | 3 Months Ended | |||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Jun. 28, 2014
|
Jun. 29, 2013
|
Jun. 28, 2014
|
Jun. 29, 2013
|
Sep. 28, 2013
|
Jun. 28, 2014
Equipment [Member]
|
Sep. 28, 2013
Equipment [Member]
|
Dec. 28, 2013
Equipment [Member]
Minimum [Member]
|
Dec. 28, 2013
Equipment [Member]
Maximum [Member]
|
Jun. 28, 2014
Coffee Service Equipment [Member]
|
Sep. 28, 2013
Coffee Service Equipment [Member]
|
Dec. 28, 2013
Coffee Service Equipment [Member]
Minimum [Member]
|
Dec. 28, 2013
Coffee Service Equipment [Member]
Maximum [Member]
|
Jun. 28, 2014
Computer Equipment and Software [Member]
|
Sep. 28, 2013
Computer Equipment and Software [Member]
|
Dec. 28, 2013
Computer Equipment and Software [Member]
Minimum [Member]
|
Dec. 28, 2013
Computer Equipment and Software [Member]
Maximum [Member]
|
Jun. 28, 2014
Land [Member]
|
Sep. 28, 2013
Land [Member]
|
Jun. 28, 2014
Building and Building Improvements [Member]
|
Sep. 28, 2013
Building and Building Improvements [Member]
|
Dec. 28, 2013
Building and Building Improvements [Member]
Minimum [Member]
|
Dec. 28, 2013
Building and Building Improvements [Member]
Maximum [Member]
|
Jun. 28, 2014
Furniture and Fixtures [Member]
|
Sep. 28, 2013
Furniture and Fixtures [Member]
|
Dec. 28, 2013
Furniture and Fixtures [Member]
Minimum [Member]
|
Dec. 28, 2013
Furniture and Fixtures [Member]
Maximum [Member]
|
Jun. 28, 2014
Vehicles [Member]
|
Sep. 28, 2013
Vehicles [Member]
|
Dec. 28, 2013
Vehicles [Member]
Minimum [Member]
|
Dec. 28, 2013
Vehicles [Member]
Maximum [Member]
|
Jun. 28, 2014
Leasehold Improvements [Member]
|
Sep. 28, 2013
Leasehold Improvements [Member]
|
Dec. 28, 2013
Leasehold Improvements [Member]
Minimum [Member]
|
Dec. 28, 2013
Leasehold Improvements [Member]
Maximum [Member]
|
Dec. 28, 2013
Assets Held under Capital Leases [Member]
|
Jun. 28, 2014
Assets Held under Capital Leases [Member]
|
Sep. 28, 2013
Assets Held under Capital Leases [Member]
|
Jun. 28, 2014
Construction in Progress [Member]
|
Sep. 28, 2013
Construction in Progress [Member]
|
|
Fixed Assets | ||||||||||||||||||||||||||||||||||||||||
Useful life in years | 1 year | 15 years | 3 years | 7 years | 1 year | 7 years | 4 years | 30 years | 1 year | 15 years | 4 years | 5 years | 1 year | 20 years | 15 years | |||||||||||||||||||||||||
Total fixed assets | $ 1,660,303,000 | $ 1,660,303,000 | $ 1,420,778,000 | $ 747,430,000 | $ 680,457,000 | $ 62,494,000 | $ 59,169,000 | $ 161,468,000 | $ 146,246,000 | $ 11,363,000 | $ 11,520,000 | $ 151,656,000 | $ 134,495,000 | $ 31,024,000 | $ 33,975,000 | $ 12,488,000 | $ 11,786,000 | $ 98,682,000 | $ 98,990,000 | $ 41,200,000 | $ 41,200,000 | $ 342,498,000 | $ 202,940,000 | |||||||||||||||||
Accumulated depreciation and amortization | (554,655,000) | (554,655,000) | (435,215,000) | |||||||||||||||||||||||||||||||||||||
Fixed assets, net | 1,105,648,000 | 1,105,648,000 | 985,563,000 | 34,800,000 | 36,900,000 | |||||||||||||||||||||||||||||||||||
Depreciation and amortization | 55,000,000 | 49,900,000 | 159,189,000 | 137,734,000 | ||||||||||||||||||||||||||||||||||||
Properties under construction | $ 54,900,000 |
Derivative Financial Instruments (Details 3) (USD $)
In Thousands, unless otherwise specified |
Jun. 28, 2014
|
Sep. 28, 2013
|
---|---|---|
Derivatives | ||
Gross amounts of recognized assets | $ 10,230 | $ 13 |
Gross amounts offset in the Consolidated Balance Sheet | (1,549) | |
Net amount of assets presented in the Consolidated Balance Sheet | 8,681 | 13 |
Gross amounts not offset in the Consolidated Balance Sheet | ||
Net amount | $ 8,681 | $ 13 |
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