Table of Contents

 

 

FORM 10-Q

 

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

(Mark One)

 

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

 

For the thirteen weeks ended December 26, 2015

 

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

 

 

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.

 

 

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 January 28, 2016, 149,493,728 shares of common stock of the registrant were outstanding.

 

 

Table of Contents

 

KEURIG GREEN MOUNTAIN, INC.

Form 10-Q

For the Thirteen Weeks Ended December 26, 2015

 

Table of Contents

 

		Page
PART I. FINANCIAL INFORMATION		1
Item 1.	Financial Statements	1
	Unaudited Consolidated Balance Sheets	1
	Unaudited Consolidated Statements of Operations	2
	Unaudited Consolidated Statements of Comprehensive Income	3
	Unaudited Consolidated Statement of Changes in Stockholders’ Equity	4
	Unaudited Consolidated Statements of Cash Flows	5
	Notes to Unaudited Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	48
Item 4.	Controls and Procedures	50
PART II. OTHER INFORMATION		51
Item 1.	Legal Proceedings	51
Item 1A.	Risk Factors	51
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	52
Item 6.	Exhibits	52
Signatures		54

 

Table of Contents

 

Part I.  Financial Information

Item 1.  Financial Statements

 

KEURIG GREEN MOUNTAIN, INC.

Unaudited Consolidated Balance Sheets

(Dollars in thousands, except per share data)

 

		December 26, 2015			September 26, 2015
Assets
Current assets:
Cash and cash equivalents		$	214,909		$	59,334
Restricted cash and cash equivalents		25,561			30,460
Receivables, less uncollectible accounts and return allowances of $53,247 and $35,459 at December 26, 2015 and September 26, 2015, respectively		572,185			517,936
Inventories		517,745			691,980
Income taxes receivable		8,869			51,786
Other current assets		102,265			95,526
Deferred income taxes, net		70,390			70,181
Total current assets		1,511,924			1,517,203
Fixed assets, net		1,264,509			1,293,563
Intangibles, net		401,235			423,887
Goodwill		734,991			747,406
Deferred income taxes, net		831			854
Long-term restricted cash		266			278
Other long-term assets		17,697			18,386
Total assets		$	3,931,453		$	4,001,577
Liabilities and Stockholders’ Equity
Current liabilities:
Current portion of long-term debt		$	270		$	279
Current portion of capital lease and financing obligations		3,010			3,271
Accounts payable		266,912			298,609
Accrued expenses		231,584			226,519
Income tax payable		413			1,085
Dividend payable		48,486			44,048
Deferred income taxes, net		332			264
Other current liabilities		28,463			28,049
Total current liabilities		579,470			602,124
Long-term debt, less current portion		480,740			330,766
Capital lease and financing obligations, less current portion		116,505			117,187
Deferred income taxes, net		192,133			195,063
Other long-term liabilities		42,944			42,525
Commitments and contingencies
Redeemable noncontrolling interests		—			4,554
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 - 149,187,975 and 153,209,256 shares at December 26, 2015 and September 25, 2015, respectively		14,919			15,321
Additional paid-in capital		660,077			879,060
Retained earnings		2,070,319			2,014,279
Accumulated other comprehensive loss		(225,654		)	(199,302		)
Total stockholders’ equity		2,519,661			2,709,358
Total liabilities and stockholders’ equity		$	3,931,453		$	4,001,577

 

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

 

1

Table of Contents

 

KEURIG GREEN MOUNTAIN, INC.

Unaudited Consolidated Statements of Operations

(Dollars in thousands, except per share data)

 

		Thirteen weeks ended
		December 26, 2015			December 27, 2014
Net sales		$	1,258,421		$	1,386,358
Cost of sales		898,424			922,236
Gross profit		359,997			464,122
Selling and operating expenses		137,573			176,522
General and administrative expenses		60,930			71,673
Restructuring expenses		681			—
Operating income		160,813			215,927
Other (expense) income, net		(223		)	181
Gain on financial instruments, net		1,395			3,345
Loss on foreign currency, net		(809		)	(9,071		)
Interest expense		(2,244		)	(1,087		)
Income before income taxes		158,932			209,295
Income tax expense		(54,435		)	(74,616		)
Net income		$	104,497		$	134,679
Net income attributable to noncontrolling interests		—			100
Net income attributable to Keurig		$	104,497		$	134,579
Net income attributable to Keurig per common share:
Basic		$	0.70		$	0.83
Diluted		$	0.69		$	0.82
Cash dividends declared per common share		$	0.325		$	0.2875
Weighted-average common shares outstanding:
Basic		150,236,842			162,181,332
Diluted		150,959,148			164,075,038

 

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

 

2

Table of Contents

 

KEURIG GREEN MOUNTAIN, INC.

Unaudited Consolidated Statements of Comprehensive Income

(Dollars in thousands)

 

		Thirteen weeks ended									Thirteen weeks ended
		December 26, 2015									December 27, 2014
		Pre-tax			Tax (expense) benefit			After-tax			Pre-tax			Tax (expense) benefit			After-tax
Net income								$	104,497								$	134,679
Other comprehensive income (loss):
Cash flow hedges:
Unrealized gains (losses) arising during the period		$	599		$	(160	)	$	439		$	(406	)	$	174		$	(232	)
Gains reclassified to net income		(861		)	303			(558		)	(565		)	236			(329		)
Foreign currency translation adjustments		(26,166		)	—			(26,166		)	(30,299		)	—			(30,299		)
Other comprehensive loss		$	(26,428	)	$	143		$	(26,285	)	$	(31,270	)	$	410		$	(30,860	)
Total comprehensive income								78,212									103,819
Total comprehensive income (loss) attributable to noncontrolling interests								58									(404		)
Total comprehensive income attributable to Keurig								$	78,154								$	104,223

 

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

 

3

Table of Contents

 

KEURIG GREEN MOUNTAIN, INC.

Unaudited Consolidated Statement of Changes in Stockholders’ Equity

For the Thirteen Weeks Ended December 26, 2015

(Dollars in thousands)

 

													Accumulated
													other
		Common stock					Additional paid-			Retained			comprehensive			Stockholders’
		Shares		Amount			in capital			earnings			loss			equity
Balance at September 26, 2015		153,209,256		$	15,321		$	879,060		$	2,014,279		$	(199,302	)	$	2,709,358
Options exercised		175,224		18			5,370			—			—			5,388
Restricted stock awards and units		167,681		16			(16		)	—			—			—
Repurchase of common stock		(4,364,186	)	(436		)	(234,599		)	—			—			(235,035		)
Stock compensation expense		—		—			9,295			—			—			9,295
Tax benefit from equity-based compensation plans		—		—			881			—			—			881
Deferred compensation expense		—		—			86			—			—			86
Other comprehensive loss, net of tax		—		—			—			—			(26,352		)	(26,352		)
Net income attributable to Keurig		—		—			—			104,497			—			104,497
Cash dividends declared		—		—			—			(48,457		)	—			(48,457		)
Balance at December 26, 2015		149,187,975		$	14,919		$	660,077		$	2,070,319		$	(225,654	)	$	2,519,661

 

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

 

4

Table of Contents

 

KEURIG GREEN MOUNTAIN, INC.

Unaudited Consolidated Statements of Cash Flows

(Dollars in thousands)

 

		Thirteen			Thirteen
		weeks ended			weeks ended
		December 26, 2015			December 27, 2014
Cash flows from operating activities:
Net income		$	104,497		$	134,679
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of fixed assets		60,609			51,049
Amortization of intangibles		12,108			10,110
Amortization of deferred financing fees		368			1,413
Loss on impairment of fixed assets		8,332			—
Unrealized (gain) loss on foreign currency, net		(3,558		)	8,981
Provision for doubtful accounts		1,019			2,479
Provision for sales returns		40,829			42,856
Gain on derivatives, net		(1,935		)	(3,462		)
Excess tax benefits from equity-based compensation plans		(881		)	(12,324		)
Deferred income taxes		(416		)	3
Deferred compensation and stock compensation		9,381			10,407
Other		871			834
Changes in assets and liabilities, net of acquisition:
Receivables		(97,813		)	(69,245		)
Inventories		172,456			51,001
Income tax receivable/payable, net		43,096			(84,205		)
Other current assets		(5,391		)	(3,654		)
Other long-term assets, net		194			1,297
Accounts payable and accrued expenses		(10,875		)	(3,912		)
Other current liabilities		934			(24,498		)
Other long-term liabilities		505			28,599
Net cash provided by operating activities		334,330			142,408
Cash flows from investing activities:
Change in restricted cash		4,296			(158		)
Acquisition, net of cash acquired		—			(180,698		)
Capital expenditures for fixed assets		(57,911		)	(100,303		)
Other investing activities		192			(1,273		)
Net cash used in investing activities		(53,423		)	(282,432		)
Cash flows from financing activities:
Net change in revolving line of credit		150,000			—
Proceeds from issuance of common stock under compensation plans		5,388			3,170
Repurchase of common stock		(235,035		)	(80,898		)
Purchase of noncontrolling interest		(4,454		)	—
Excess tax benefits from equity-based compensation plans		881			12,324
Payments on capital lease and financing obligations		(949		)	(853		)
Repayment of long-term debt		—			(4,690		)
Dividends paid		(44,019		)	(40,580		)
Other financing activities		—			(140		)
Net cash used in financing activities		(128,188		)	(111,667		)
Effect of exchange rate changes on cash and cash equivalents		2,856			(3,164		)
Net increase (decrease) in cash and cash equivalents		155,575			(254,855		)
Cash and cash equivalents at beginning of period		59,334			761,214
Cash and cash equivalents at end of period		$	214,909		$	506,359
Supplemental disclosures of cash flow information:
Fixed asset purchases included in accounts payable and not disbursed at the end of each period		$	18,203		$	68,292
Dividends declared not paid at the end of each period		$	48,486		$	46,594
Noncash investing and financing activities:
Fixed assets acquired under capital lease and financing obligations		$	—		$	375

 

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

 

5

Table of Contents

 

Keurig Green Mountain, Inc.

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 26, 2015 balance sheet data were derived from audited financial statements, but do not include all disclosures required by GAAP.  For further information, refer to the consolidated financial statements and the footnotes included in Keurig Green Mountain Inc.’s Annual Report on Form 10-K for the fiscal year ended September 26, 2015.  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 Developments

 

On December 6, 2015, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”), by and among Acorn Holdings B.V., a private limited liability company incorporated under the laws of the Netherlands (“Acorn”), Maple Holdings Acquisition Corp., a Delaware corporation and wholly owned subsidiary of Acorn (“Acquisition Sub”), the Company and, solely for purposes of Article IX of the Merger Agreement, JAB Holdings B.V., a private limited liability company incorporated under the laws of the Netherlands (“JAB”).  Acorn is owned by an investor group led by JAB Holding Company S.à r.l (“JAB Holding”) and is the holding company of Jacobs Douwe Egberts, a global coffee and tea company.  The Merger Agreement and the consummation of the transactions contemplated by the Merger Agreement have been unanimously approved by the Company’s board of directors (the “Company Board”).

 

The Merger Agreement provides for the merger of Acquisition Sub with and into the Company, on the terms and subject to the conditions set forth in the Merger Agreement (the “Merger”), with the Company surviving the Merger as a wholly owned subsidiary of Acorn.

 

Pursuant to the Merger Agreement, at the effective time of the Merger (the “Effective Time”), each share (a “Share”) of common stock of the Company, par value $0.10 per Share (“Company Common Stock”), issued and outstanding immediately prior to the Effective Time (other than (i) Shares owned by Acorn, any subsidiary of Acorn, Acquisition Sub or the Company, in each case immediately prior to the Effective Time, and (ii) Shares held by stockholders who have not voted in favor of the Merger and who have properly and validly perfected their statutory rights of appraisal in respect of such Shares in accordance with Section 262 of the Delaware General Corporation Law) will be canceled and converted into the right to receive $92.00 in cash without interest thereon (the “Merger Consideration”), subject to applicable tax withholding.  JAB has agreed to guarantee the payment and performance obligations of Acorn and Acquisition Sub under the Merger Agreement.

 

The consummation of the Merger is subject to the satisfaction or waiver of specified closing conditions, including (i) the affirmative vote in favor of the adoption of the Merger Agreement by the holders of a majority of the outstanding Shares entitled to vote thereon, (ii) any applicable waiting periods (or extensions thereof) under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the “HSR Act”) and the Competition Act (Canada) having expired or been terminated, (iii) the absence of a Company Material Adverse Effect (as defined in the Merger Agreement) after the date of the Merger Agreement and (iv) other customary closing conditions.  The consummation of the Merger is not subject to a financing condition.

 

Additional information about the Merger Agreement is set forth in the Company’s Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission (“SEC”) on December 8, 2015.

 

6

Table of Contents

 

Other than transaction expenses associated with the proposed Merger, the terms of the Merger Agreement did not impact the Company’s consolidated financial statements as of and for the thirteen weeks ended December 26, 2015.

 

3.              Recent Accounting Pronouncements

 

In November 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes (“ASU 2015-17”), which requires management to classify all deferred tax liabilities and assets by jurisdiction as non-current on the balance sheet instead of separating deferred taxes into current and non-current amounts.  The standard is effective for the Company beginning in fiscal 2018 and can be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented.  Early adoption is permitted as of the beginning of any interim or annual reporting period.  The adoption of ASU 2015-05 is not expected to have a material impact on the Company’s financial condition or financial statement disclosures.

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”).  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.  In August 2015, the FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers” (Topic 606): Deferral of the Effective Date, which delays the effective date of ASU 2014-09 by one year.  As a result, ASU 2014-09 will become effective for the Company beginning in fiscal 2019 under either full or modified retrospective adoption, with early adoption permitted as of the original effective date of ASU 2014-09.  The Company is currently assessing the potential effects of these changes on the Company’s net income, financial position, cash flows and disclosures.

 

In April 2015, the FASB issued ASU No. 2015-03 - Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”), which changes the presentation of debt issuance costs in financial statements.  Under ASU 2015-03, an entity will present such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset.  Amortization of the costs will continue to be reported as interest expense.  In August 2015, the FASB issued ASU No. 2015-15 - Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements (“ASU 2015-15”), which incorporates the SEC staff’s announcement that clarifies the exclusion of line-of-credit arrangements from the scope of ASU 2015-03.  The ASU clarifies that debt issuance costs related to line-of-credit arrangements can continue to be deferred and presented as an asset that is subsequently amortized over the time of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement.  ASU 2015-03 is effective retrospectively for interim and annual periods beginning after December 15, 2015.  The Company expects to adopt ASU 2015-03 effective for its fiscal second quarter ending March 26, 2016 and the adoption of the new guidance is not expected to have a material impact on the Company’s financial condition or financial statement disclosures.

 

In July 2015, the FASB issued ASU No. 2015-11 - Simplifying the Measurement of Inventory (“ASU 2015-11”)  that changes the measurement principle for inventory from the lower of cost or market to the lower of cost or net realizable value.  The amendments in this guidance do not apply to inventory that is measured using last-in, first-out or the retail inventory method; rather, the amendments apply to all other inventory, which includes inventory that is measured using first-in, first-out or average cost.  Within the scope of this new guidance, an entity should measure inventory at the lower of cost or net realizable value.  Net realizable value is defined as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation, which is consistent with existing GAAP.  ASU 2015-11 is effective for interim and annual periods beginning after December 15, 2016, with early adoption permitted.  The Company expects to adopt ASU 2015-11 beginning in its third quarter of fiscal 2016.  The adoption of ASU 2015-11 is not expected to have a material impact on the Company’s net income, financial position, cash flows or disclosures.

 

In April 2015, the FASB issued ASU No. 2015-05 - Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement (an update to Subtopic 350-40, Intangibles - Goodwill and Other - Internal-Use Software ) (“ASU 2015-05”), which provides guidance on accounting for cloud computing fees.  If a cloud computing arrangement includes a software license, then the customer should account for the license element of the arrangement consistent within the acquisition of other software licenses.  If a cloud computing arrangement does not include a software license, the arrangement should be accounted for as a service contract.  ASU 2015-05 is effective for arrangements entered into, or materially modified, in interim and annual periods beginning after December 15, 2015.  Retrospective application is permitted but not required.  The adoption of ASU 2015-05 is not expected to have a material impact on the Company’s net income, financial position, cash flows or disclosures.

 

7

Table of Contents

 

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, which requires management to assess whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the financial statements are issued.  If substantial doubt exists, additional disclosures are required.  ASU 2014-15 will be effective for the Company in the fourth quarter of 2017.  The adoption of ASU 2014-15 is not expected to have a material impact on the Company’s disclosures.

 

4.              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 operations related to international expansion, and a Canada segment containing all Canadian operations.

 

The Domestic segment sells Keurig® hot and KOLD™ system appliances and accessories, and sources, produces and sells coffee, hot cocoa, teas and other beverages, including our Keurig® KOLD™ beverages, in pods, including K-Cup®, Vue®, K-Mug™, and K-Carafe™ pods and coffee in more traditional packaging including bags and fractional packages 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 the Company’s website.  Substantially all of the Domestic segment’s distribution to major retailers is processed by fulfillment entities which receive and fulfill sales orders and invoice certain retailers primarily in the At Home (“AH”) channel.  The Domestic segment also earns royalty income from pods sold by a third-party licensed roaster.

 

The Canada segment sells Keurig® hot and KOLD™ system appliances and accessories, and sources, produces and sells coffee, teas and other beverages, including our Keurig® KOLD™ beverages, in pods and coffee in more traditional packaging, including bags, cans, and fractional packages under a variety of brands to retailers including supermarkets, department stores, mass merchandisers, club stores, office coffee distributors, and, through office coffee services to offices, convenience stores, restaurants, hospitality accounts, and to consumers through its website.

 

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

 

Expenses not specifically related to an operating segment are presented under “Corporate Unallocated.”  Corporate Unallocated expenses are comprised mainly of the compensation and other related expenses of certain of the Company’s senior executive officers and other selected employees who perform duties related to the entire enterprise.  Corporate Unallocated expenses also include depreciation for corporate headquarters, sustainability expenses, legal expenses, and other professional fees.

 

8

Table of Contents

 

The following tables summarize selected financial data for segment disclosures for the thirteen weeks ended December 26, 2015 and December 27, 2014, respectively:

 

		Thirteen weeks ended December 26, 2015
		(Dollars in thousands)
		Domestic			Canada			Corporate- Unallocated			Consolidated
Net sales		$	1,127,267		$	131,154		$	—		$	1,258,421
Operating income (loss)		$	175,308		$	17,673		$	(32,168	)	$	160,813
Depreciation and amortization		$	56,531		$	11,756		$	4,430		$	72,717
Stock compensation		$	4,265		$	665		$	4,365		$	9,295

 

		Thirteen weeks ended December 27, 2014
		(Dollars in thousands)
		Domestic			Canada			Corporate- Unallocated			Consolidated
Net sales		$	1,215,458		$	170,900		$	—		$	1,386,358
Operating income (loss)		$	236,601		$	21,588		$	(42,262	)	$	215,927
Depreciation and amortization		$	44,586		$	13,859		$	2,714		$	61,159
Stock Compensation		$	5,831		$	723		$	3,837		$	10,391

 

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
		December 26, 2015			December 27, 2014
Operating income		$	160,813		$	215,927
Other (expense) income, net		(223		)	181
Gain on financial instruments, net		1,395			3,345
Loss on foreign currency, net		(809		)	(9,071		)
Interest expense		(2,244		)	(1,087		)
Income before income taxes		$	158,932		$	209,295

 

5                 Restructuring Programs

 

On July 31, 2015, the Company’s Board of Directors approved a multi-year productivity program intended to reduce structural costs and streamline organizational structures to drive efficiency.  Over the first two quarters of the program, the Company has reduced its workforce by approximately 330 employees, or 5%.  Implementation of the productivity program is expected to result in cumulative pre-tax restructuring charges of approximately $18.5 million, primarily including costs associated with employee terminations and other business transition costs and accelerated depreciation on assets as a result of a business exit plan.  Cumulative pretax restructuring charges of $15.9 million have been recorded through December 26, 2015, the second fiscal quarter of the program, of which approximately $11.9 million represented employee severance related costs that will be settled in cash.

 

9

Table of Contents

 

The following represents cumulative estimated pre-tax restructuring charges, by segment, to be incurred for the implementation of the productivity program (in thousands):

 

		Cumulative Expenses Incurred-to-date			Remaining Estimated Expenses			Cumulative Estimated Expenses
Domestic		$	12,533		$	—		$	12,533
Canada		2,609			2,573			$	5,182
Corporate - Unallocated		789			—			$	789
Total		$	15,931		$	2,573		$	18,504

 

During the thirteen weeks ended December 26, 2015, the Company recorded restructuring expenses for the multi-year productivity program under the caption Restructuring expenses, within operating income in the accompanying Unaudited Consolidated Statements of Operations as follows (in thousands):

 

		Severance and Related Costs			Asset Write- downs			Other Exit Activities			Total
Domestic		$	297		$	240		$	—		$	537
Canada		—			96			—			96
Corporate Unallocated		48			—			—			48
Total restructuring expenses		$	345		$	336		$	—		$	681

 

The activity for the restructuring liability associated with the multi-year productivity program was as follows (in thousands):

 

		Severance and Related Costs			Asset Write-downs			Other Exit Activities			Total
Liability balance, September 26, 2015		$	8,533		$	—		$	341		$	8,874
Charges		345			336			—			681
Cash spent		(4,463		)	—			(341		)	(4,804		)
Non-cash settlements / adjustments		—			(336		)	—			(336		)
Foreign currency adjustments		(44		)	—			—			(44		)
Liability balance, December 26, 2015		$	4,371		$	—		$	—		$	4,371

 

The Company spent $4.5 million during the thirteen weeks ended December 26, 2015 in cash severance and related costs.  The Company also recognized non-cash asset write-downs (including accelerated depreciation) and other non-cash adjustments totaling $0.3 million during the thirteen weeks ended December 26, 2015.  The Company’s accrued restructuring liability is included in the caption, Accrued expenses, in the accompanying Unaudited Consolidated Balance Sheets.

 

6.              Inventories

 

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

 

		December 26, 2015			September 26, 2015
Raw materials and supplies		$	184,767		$	227,529
Finished goods		332,978			464,451
		$	517,745		$	691,980

 

At December 26, 2015, the Company had approximately $224.6 million in green coffee purchase commitments, of which approximately 88% had a fixed price.  These commitments primarily extend through fiscal 2017.  The value of the variable portion of these commitments was calculated using an average “C” price of coffee of $1.26 per pound at December 26, 2015.  In addition to its green coffee commitments, the Company had approximately $263.5 million in fixed price brewer and related accessory purchase commitments and $864.9 million in production raw material commitments at December 26, 2015.  The Company believes based on relationships established with its suppliers, that the risk of non-delivery on such purchase commitments is remote.

 

10

Table of Contents

 

As of December 26, 2015, minimum future inventory purchase commitments were as follows (in thousands):

 

Fiscal Year		Inventory Purchase Obligations(1)
Remainder of 2016		$	430,879
2017		488,409
2018		258,140
2019		109,805
2020		65,762
Thereafter		—
		$	1,352,995

 

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

 

11

Table of Contents

 

7.              Acquisition

 

On December 18, 2014, the Company, through its wholly owned subsidiary Keurig International S.à.r.l., acquired all of the outstanding equity of MDS Global Holding p.l.c. (“Bevyz”), a manufacturer and distributor of an all-in-one drink system, for total cash consideration of $180.7 million, net of cash acquired.  The Company currently intends to hold the rights to the technology acquired to prevent others from using such technology.  Such defensive action likely contributes to the value of the Company’s Keurig® KOLD™ beverage system.  The goodwill represents the excess value of the purchase price over the aggregate fair value of the tangible and intangible assets acquired.  The goodwill primarily represents the intangible assets that do not qualify for separate recognition, such as expected synergies from combined operations and assembled workforces, and the future development initiatives of the assembled workforces.  The goodwill and intangible assets recognized in the acquisition are not deductible for tax purposes.

 

Prior to the acquisition, the Company owned approximately 15% of the outstanding equity of Bevyz.  During the fiscal second quarter ended March 28, 2015, the Company completed its valuation of the fair value of the business acquired and the acquisition date fair value of the Company’s previously held equity interest in Bevyz and the Company has concluded there were no measurement period adjustments to record.  The fair value for 100% of Bevyz identifiable assets less liabilities assumed was determined using an income approach.  The excess of (i) the sum of the consideration for the shares purchased on December 18, 2014 and the acquisition date fair value of the Company’s previously held equity interest in Bevyz, over (ii) 100% of the fair value of identifiable assets acquired less liabilities assumed, was recognized as goodwill.  The acquisition date fair value of the Company’s previously held equity interest in Bevyz was determined using a market approach, specifically prior transactions in shares of Bevyz.  Amortizable intangible assets acquired, valued at the date of acquisition, include approximately $161.7 million for defensive intangible assets, $3.8 million for non-compete agreements and $1.6 million for contractual agreements.  Amortizable intangible assets are amortized on a straight-line basis over their respective useful lives, and the weighted-average amortization period is 12.8 years.  The weighted-average amortization periods for defensive intangible assets, non-compete agreements, and contractual agreements are 13 years, 3 years, and 15 years, respectively.

 

The following summarizes the final allocation of fair value (in thousands):

 

Accounts receivable		$	218
Inventories		743
Other current assets		504
Fixed assets		2,370
Other long-term assets		247
Intangibles		167,085
Goodwill		60,179
Accounts payable and accrued expenses		(5,911		)
Capital lease obligation		(763		)
Deferred tax liability		(8,325		)
Other long-term liabilities		(1,274		)
Total estimated fair value net assets acquired		215,073
Less fair value of previously held equity interest in Bevyz		(34,375		)
Total cash paid, net of cash acquired		$	180,698

 

Acquisition costs of $1.5 million were expensed as incurred and recognized in general and administrative expenses in the fourth quarter of fiscal 2014.  Approximately $24.5 million of the purchase price was held in escrow at December 26, 2015 and is included under the captions Restricted cash and cash equivalents and Other current liabilities in the accompanying unaudited Consolidated Balance Sheet.  The revenue and earnings of Bevyz since acquisition and the pro forma financial statements are immaterial.  For information on the assignment of goodwill to our operating segments, see Note 9, Goodwill and Intangible Assets.

 

12

Table of Contents

 

8.              Fixed Assets

 

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

 

		Useful Life in Years		December 26, 2015			September 26, 2015
Production equipment		1-15		$	894,833		$	856,235
Coffee service equipment		3-7		42,402			51,261
Computer equipment and software		1-6		257,745			257,075
Land		Indefinite		13,999			14,124
Building and building improvements		4-30		352,679			341,514
Furniture and fixtures		1-15		34,994			36,254
Vehicles		4-25		28,823			11,847
Leasehold improvements		1-20 or remaining life of lease, whichever is less		123,230			121,933
Assets acquired under capital leases		5-15		41,987			42,003
Construction-in-progress				232,987			276,743
Total fixed assets				$	2,023,679		$	2,008,989
Accumulated depreciation and amortization				(759,170		)	(715,426		)
				$	1,264,509		$	1,293,563

 

Assets acquired under capital leases, net of accumulated amortization, were $31.3 million and $32.0 million at December 26, 2015 and September 26, 2015, respectively.

 

Total depreciation and amortization expense relating to all fixed assets was $60.6 million and $51.0 million for the thirteen weeks ended December 26, 2015 and December 27, 2014, respectively.

 

In September 2015, the Company decided to discontinue sales of the Keurig® BOLT® brewer and accordingly revised its forecasted unit sales for fiscal year 2016 and beyond and recorded an impairment loss in the fourth quarter.  At the time there were certain assets which the Company planned to repurpose, however upon further review these assets will not be utilized.  Therefore, the Company recorded an impairment loss of $8.3 million in the first quarter of fiscal 2016, which was included in Cost of sales in the accompanying unaudited Consolidated Statements of Operations.  These impairment losses were recorded in the Domestic segment.  The fair value of the Keurig® BOLT® asset group was determined based upon the discounted cash flow method.

 

9.              Goodwill and Intangible Assets

 

The following represented the change in the carrying amount of goodwill by segment for the thirteen weeks ended December 26, 2015 (in thousands):

 

		Domestic(1)			Canada			Total
Balance at September 26, 2015		$	423,958		$	323,448		$	747,406
Foreign currency effect		(1,073		)	(11,342		)	(12,415		)
Balance at December 26, 2015		$	422,885		$	312,106		$	734,991

 

(1)         See Note 7, Acquisition for discussion of Goodwill recognized in connection with the Bevyz acquisition.

 

13

Table of Contents

 

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

 

		December 26, 2015			September 26, 2015
Trade names		$	72,877		$	75,525

 

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:

 

				December 26, 2015						September 26, 2015
		Useful Life in Years		Gross Carrying Amount			Accumulated Amortization			Gross Carrying Amount			Accumulated Amortization
Acquired technology		4-15		$	17,855		$	(15,797	)	$	17,891		$	(15,378	)
Defensive intangible assets(2)		13		143,889			(11,281		)	146,772			(8,685		)
Customer and roaster agreements		10-11		7,887			(5,771		)	8,047			(5,670		)
Customer relationships		2-16		333,396			(158,738		)	342,113			(155,047		)
Trade names		5-11		32,859			(18,157		)	33,315			(17,541		)
Non-compete agreements		3-5		3,352			(1,136		)	3,419			(874		)
Total				$	539,238		$	(210,880	)	$	551,557		$	(203,195	)

 

(2)         See Note 7, Acquisition for discussion of defensive intangible assets acquired in connection with the Bevyz acquisition.

 

Definite-lived intangible assets are amortized on a straight-line basis over the period of expected economic benefit.  Total amortization expense was $12.1 million and $10.1 million for the thirteen weeks ended December 26, 2015 and December 27, 2014, respectively.

 

The estimated aggregate amortization expense for the remainder of fiscal 2016, for each of the next five years and thereafter, is as follows (in thousands):

 

Fiscal Year		Amortization Expense
Remainder of 2016		$	35,125
2017		46,076
2018		44,743
2019		44,400
2020		39,631
2021		30,964
Thereafter		87,419

 

10.       Product Warranties

 

The Company offers a one-year warranty on all Keurig® hot and Keurig® KOLD™ beverage systems.  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.

 

14