Acquisitions

9 Months Ended

Jun. 25, 2011

Acquisitions

Acquisitions

4. Acquisitions

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

On December 17, 2010, the Company acquired Van Houtte through the purchase of all of the outstanding capital stock of LJVH Holdings, Inc., a specialty coffee roaster headquartered in Montreal, Quebec, for approximately USD $907.8 million, net of cash acquired. The acquisition was financed with cash on hand and a new $1.45 billion credit facility (see Note 10, Long-Term Debt). Van Houtte's functional currency is the Canadian dollar.

Van Houtte specializes in sourcing, producing, and selling coffees in a variety of packaging formats, including K-Cup^® portion packs whose brands include Van Houtte^®, Brûlerie St. Denis^®, Brûlerie Mont-Royal^® and Orient Express^® and its licensed Bigelow^® and Wolfgang Puck^® brands.

The Company is pursuing a sale of the Van Houtte U.S. Coffee Service business ("Filterfresh"). The Company has accounted for all the assets relating to the Filterfresh business as held-for-sale. See Note 8, Assets Held for Sale, for further information.

This quarter the Company has finalized the valuation and purchase price allocation for Van Houtte. In the Q1'11 and Q2'11 Form 10-Qs, the Company reported provisional amounts as it completed the valuation work and initial accounting for the Van Houtte acquisition. In the Q2'11 Form 10-Q the Company revised the Q1'11 results as presented in the Statement of Operations for the twenty-six weeks ended March 26, 2011 to reflect new information relating to facts and circumstances that existed as of the acquisition date. The revisions did not have a material impact on the Statement of Operations for the thirteen weeks ended December 25, 2011. As a result of these revisions, the Statement of Operations for the thirteen weeks ended December 25, 2011 as presented in the Q1'11 Form 10-Q when added to the Statement of Operations for the thirteen weeks ended March 26, 2011 as presented in the Q2'11 Form 10-Q will not total to the Statement of Operations for the twenty-six weeks ended March 26, 2011 as presented in the Q2'11 Form 10-Q. In the Company's Q3'11 Form 10-Q, there were no additional adjustments to the Q1'11 or Q2'11 results.

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

	Total			Van Houtte Canadian Operations			Filterfresh Assets Held For Sale
Restricted cash	$	500		$	500		$	—
Accounts receivable		61,130			47,554			13,576
Inventories		42,958			36,691			6,267
Income taxes receivable		2,260			2,190			70
Deferred income taxes		4,903			3,577			1,326
Other current assets		5,047			4,453			594
Fixed assets		143,928			110,622			33,306
Intangible assets		375,099			355,549			19,550
Goodwill		472,331			409,493			62,838
Other long-term assets		1,577			962			615
Accounts payable and accrued expenses		(54,502	)		(46,831	)		(7,671	)
Other short-term liabilities		(4,330	)		(3,404	)		(926	)
Income taxes payable		(1,496	)		(1,496	)		—
Deferred income taxes		(117,086	)		(104,866	)		(12,220	)
Notes payable		(2,914	)		(1,770	)		(1,144	)
Other long-term liabilities		(2,452	)		(1,683	)		(769	)
Non-controlling interests		(19,118	)		(9,529	)		(9,589	)
	$	907,835		$	802,012		$	105,823

The purchase price allocated to Filterfresh was the fair value, less the estimated direct costs to sell Filterfresh established at the acquisition date. The fair value of Filterfresh was estimated using an Income Approach, specifically the Discounted Cash Flow ("DCF") method. Under the DCF method the fair value is calculated by discounting the projected after-tax cash flows for the business to present value. The Income Approach includes assumptions about the amount and timing of future cash flows using projections and other estimates. A discount rate based on our weighted average cost of capital was applied to the estimated future cash flows to estimate the fair value. Prior to finalizing the valuation for Van Houtte this quarter, the Company estimated the fair value of Filterfresh using a Market Approach. The Company concluded an Income Approach was more appropriate given the lack of public comparable companies and transactions for the application of the Market Approach.

An income approach, specifically the discounted cash flow method, was used to value the noncontrolling interests.

Amortizable intangible assets acquired include approximately $263.1 million for customer relationships, $10.9 million for trademarks and trade names, $1.4 million for franchises and $0.3 million for technology. Indefinite lived intangible assets acquired include approximately $99.4 million for the Van Houtte trademark which is not amortized. The definite lived intangible assets classified as held-for-sale are not amortized and approximated $19.5 million. Amortizable intangible assets are amortized on a straight-line basis over their respective useful live, and the weighted-average amortization period is 10.8 years.

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

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

At June 25, 2011, approximately $30.0 million of the purchase price is held in escrow and is included in restricted cash with corresponding amounts of $20.7 million and $9.3 million in other current liabilities and other long-term liabilities, respectively.

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

Diedrich Coffee, Inc.

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

Diedrich specializes in sourcing, roasting, and selling specialty coffee in a variety of packaging formats, including K-Cup^® portion packs whose brands include Diedrich Coffee^®, Coffee People^® and its licensed Gloria Jean's^® brand.

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

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

Acquisition costs were expensed as incurred and totaled approximately $4.0 million and $12.0 million for the thirteen and thirty-nine weeks ended June 26, 2010, and are included in general and administrative expenses of the Company.

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

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

The acquisition was completed on May 11, 2010 and accordingly results of operations from such date have been included in the Company's Statement of Operations. Effective September 26, 2010, the beginning of the Company's fiscal year 2011, Diedrich was migrated onto the Company's common information technology platform. As a result, it is impracticable to disclose separately Diedrich's contributions to revenue and income before taxes for the thirteen and thirty-nine weeks ended June 25, 2011.

Timothy's Coffee of the World Inc.

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

Timothy's wholesale business produces specialty coffee, tea and other beverages in a variety of packaged forms, including K-Cup^® portion packs whose brands are Timothy's^® and its licensed brand Emeril's^®. The acquisition provided the Company with a Canadian presence, the Timothy's brand name and a coffee roasting and packaging facility in Toronto.

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

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

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

Acquisition costs were expensed as incurred and totaled approximately $1.9 million for the thirty-nine weeks ended June 26, 2010 and are included in general and administrative expenses of the Company.

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

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

The acquisition was completed on November 13, 2009 and accordingly results of operations from such date have been included in the Company's Statement of Operations. For the thirteen weeks ended June 25, 2011, the Timothy's operations contributed an additional $21.1 million of revenue and $6.9 million of income before taxes. For the thirty-nine weeks ended June 25, 2011, the Timothy's operations contributed an additional $48.3 million of revenue and $22.1 million of income before income taxes. For the thirteen weeks ended June 26, 2010, the Timothy's operations contributed an additional $10.3 million of revenue and $3.8 million of income before taxes. For the thirty-nine weeks ended June 26, 2010, the Timothy's operations contributed an additional $27.5 million of revenue and $6.6 million of income before income taxes.

Supplemental Pro Forma Information

The following information reflects the Company's acquisitions as if the transactions had occurred as of the beginning of the Company's fiscal 2010. The unaudited pro forma information does not necessarily reflect the actual results that would have occurred had the acquisitions been combined during the periods presented, nor is it necessarily indicative of the future results of operations of the combined companies.

The following table represents select unaudited consolidated pro forma data (in thousands):

	Thirteen weeks ended June 25, 2011		Thirteen weeks ended June 26, 2010		Thirty-nine weeks ended June 25, 2011		Thirty-nine weeks ended June 26, 2010
Unaudited Consolidated proforma revenue	$	717,210	$	442,446	$	2,037,846		$	1,304,908
Unaudited Consolidated proforma net income	$	56,348	$	26,432	$	148,485		$	60,864
Unaudited Consolidated proforma diluted earnings per common share	$	0.37	$	0.19	$	0.99		$	0.44