Segment Reporting

9 Months Ended

Jun. 23, 2012

Segment Reporting

Segment Reporting

3.Segment Reporting

The Company manages its operations through three business segments, the Specialty Coffee business unit (“SCBU”), the Keurig business unit (“KBU”) and CBU.

SCBU sources, produces and sells coffee, hot cocoa, teas and other beverages, to be prepared hot or cold, in K-Cup® and Vue® packs (“single serve packs”) and coffee in more traditional packaging including whole bean and ground coffee selections in bags and ground coffee in fractional packs.  These varieties are sold to supermarkets, club stores and convenience stores, restaurants and hospitality, office coffee distributors and also directly to consumers in the United States.  In addition, SCBU sells Keurig® Single Cup Brewing systems and other accessories to supermarkets and directly to consumers.

KBU targets its premium patented single cup brewing systems for use both at-home (“AH”) and away-from-home (“AFH”), in the United States.  KBU sells AH single cup brewers, accessories and coffee, tea, cocoa and other beverages in single serve packs produced mainly by SCBU and CBU primarily to retailers, department stores and mass merchandisers principally processing its sales orders through fulfillment entities for the AH channels.  KBU sells AFH single cup brewers to distributors for use in offices.  KBU also sells AH brewers, a limited number of AFH brewers and single serve packs directly to consumers.  KBU earns royalty income from K-Cup® packs when shipped by its third party licensed roasters, except for shipments of K-Cup® packs to KBU, for which the royalty is recognized as a reduction to the carrying cost of the inventory and as a reduction to cost of sales when sold through to third parties by KBU.  In addition, through the second quarter of fiscal 2011, KBU earned royalty income from K-Cup® packs when shipped by SCBU and CBU.

CBU sources, produces and sells coffees and teas and other beverages in a variety of packaging formats, including K-Cup® packs, and coffee in more traditional packaging such as bags, cans and fractional packs, and under a variety of brands.  The varieties are sold primarily to supermarkets, club stores and, through office coffee services to offices, convenience stores and restaurants throughout Canada.  CBU began selling the Keurig® K-Cup® Single Cup Brewing system, accessories and coffee, tea, cocoa, and other beverages in K-Cup® packs to retailers, department stores and mass merchandisers in Canada for the AH channels in the first quarter of 2012.  CBU also manufactures brewing equipment and is responsible for all the Company coffee brand sales in the grocery channel in Canada.  The CBU segment included Filterfresh through October 3, 2011, the date of sale (see Note 2, Acquisitions and Divestitures).

Management evaluates the performance of the Company’s operating segments based on several factors, including net sales and income before taxes.  Net sales are recorded on a segment basis and intersegment sales are eliminated as part of the financial consolidation process.  Income before taxes represents earnings before income taxes and includes intersegment interest income and expense and transfer pricing on intersegment sales.  The Company’s manufacturing operations occur within the SCBU and CBU segments, however, 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 functions are primarily decentralized, but currently maintain some centralization through an enterprise shared services group.  Expenses related to certain centralized administrative functions including Accounting and Information System Technology are allocated to the operating segments.  Expenses not specifically related to an operating segment are recorded in the “Corporate” segment.  Corporate 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 expenses also include depreciation expense, interest expense, foreign exchange gains or losses, certain corporate legal and acquisition-related expenses and compensation of the board of directors.

Identifiable assets by segment are those assets specifically identifiable within each segment and for the SCBU, KBU and CBU segments primarily include accounts receivable, inventories, net property, plant and equipment, goodwill, and other intangible assets.  Corporate assets include primarily cash, short-term investments, deferred tax assets, income tax receivable, certain notes receivable eliminated in consolidation, deferred issuance costs, and fixed assets related to corporate headquarters.  Goodwill and intangibles related to acquisitions are included in their respective segments.

Effective with the beginning of the Company’s third quarter of fiscal 2011, KBU no longer records royalty income from SCBU and CBU on shipments of single serve packs, thus removing the need to eliminate royalty income during the financial consolidation process.  Prior to the third quarter of fiscal 2011, the Company recorded intersegment sales and purchases of brewer and K-Cup® packs at a markup.  During the third quarter of fiscal 2011, the Company unified the standard costs of brewer and K-Cup® pack inventories across the segments and began recording intersegment sales and purchases of brewers and K-Cup® packs at new unified standard costs.  This change simplified intercompany transactions by removing the need to eliminate the markup incorporated in intersegment sales as part of the financial consolidation process.

As a result of the unification of the standard costs of brewers and K-Cup® packs during the third quarter of fiscal 2011, the Company revalued its segment inventories and recorded an adjustment in each segment, which resulted in an increase in cost of sales and a decrease in inventories.  This adjustment was offset by the reversal of the elimination of intersegment markup in inventories in the consolidation process resulting in no impact to the Company’s consolidated results.

The changes described in the two preceding paragraphs were not retrospectively applied.

Effective at the beginning of fiscal year 2012, the Company changed its organizational structure to align certain portions of its business by geography.  Prior to fiscal 2012, sales and operations associated with the Timothy’s brand were included in the SCBU segment and a portion of the AH single cup business with retailers in Canada was included in the KBU segment.  Under the new structure, Timothy’s and all of the AH single cup business with retailers in Canada are included in the CBU segment.  This resulted in a re-assignment of goodwill of $17.1 million from the SCBU segment to the CBU segment using a relative fair value approach.  In addition, effective September 25, 2011, K-Cup® pack and brewer inventories and, beginning in the second quarter of fiscal 2012, Vue® pack and brewer inventories, are now transferred directly between SCBU and KBU.  Intersegment sales are no longer transacted between SCBU and KBU.

The following tables summarize selected financial data for segment disclosures for the thirteen and thirty-nine week periods ended June 23, 2012 and June 25, 2011.  Selected financial data for segment disclosures for the thirteen and thirty-nine weeks ended June 25, 2011 have been recast to reflect Timothy’s and the AH single cup business with retailers in Canada in the CBU segment.

	For the thirteen weeks ended June 23, 2012 (Dollars in thousands)
	SCBU		KBU		CBU		Corporate			Eliminations			Consolidated
Sales to unaffiliated customers	$	386,979	$	332,792	$	149,423	$	—		$	—		$	869,194
Intersegment sales	$	1,684	$	2,197	$	20,360	$	—		$	(24,241	)	$	—
Net sales	$	388,663	$	334,989	$	169,783	$	—		$	(24,241	)	$	869,194
Income before taxes	$	90,519	$	22,623	$	23,597	$	(14,975	)	$	—		$	121,764
Total assets	$	1,428,189	$	813,245	$	1,115,797	$	601,751		$	(621,852	)	$	3,337,130
Stock compensation	$	1,069	$	942	$	379	$	2,030		$	—		$	4,420
Interest expense	$	—	$	—	$	—	$	6,157		$	—		$	6,157
Property additions	$	73,618	$	6,890	$	7,591	$	2,689		$	—		$	90,788
Depreciation and amortization	$	21,670	$	3,295	$	14,587	$	5,322		$	—		$	44,874

	For the thirteen weeks ended June 25, 2011 (Dollars in thousands )
	SCBU		KBU		CBU		Corporate			Eliminations			Consolidated
Sales to unaffiliated customers	$	275,651	$	285,340	$	156,219	$	—		$	—		$	717,210
Intersegment sales	$	72,909	$	3,320	$	25,959	$	—		$	(102,188	)	$	—
Net sales	$	348,560	$	288,660	$	182,178	$	—		$	(102,188	)	$	717,210
Income before taxes	$	66,347	$	40,563	$	24,743	$	(42,905	)	$	—		$	88,748
Total assets	$	1,010,205	$	404,788	$	1,299,088	$	540,042		$	(379,701	)	$	2,874,422
Stock compensation	$	938	$	669	$	177	$	1,219		$	—		$	3,003
Interest expense	$	—	$	—	$	—	$	29,830		$	—		$	29,830
Property additions	$	72,515	$	8,580	$	8,464	$	2,596		$	—		$	92,155
Depreciation and amortization	$	11,152	$	2,551	$	13,728	$	3,548		$	—		$	30,979

	For the thirty-nine weeks ended June 23, 2012 (Dollars in thousands )
	SCBU		KBU		CBU		Corporate			Eliminations			Consolidated
Sales to unaffiliated customers	$	1,140,829	$	1,297,106	$	474,527	$	—		$	—		$	2,912,462
Intersegment sales	$	8,447	$	7,394	$	75,935	$	—		$	(91,776	)	$	—
Net sales	$	1,149,276	$	1,304,500	$	550,462	$	—		$	(91,776	)	$	2,912,462
Income before taxes	$	267,775	$	118,718	$	98,460	$	(49,539	)	$	—		$	435,414
Total assets	$	1,428,189	$	813,245	$	1,115,797	$	601,751		$	(621,852	)	$	3,337,130
Stock compensation	$	3,330	$	2,817	$	1,504	$	5,978		$	—		$	13,629
Interest expense	$	—	$	—	$	—	$	18,662		$	—		$	18,662
Property additions	$	267,401	$	22,542	$	33,006	$	35,626		$	—		$	358,575
Depreciation and amortization	$	57,084	$	9,705	$	42,487	$	14,441		$	—		$	123,717

	For the thirty-nine weeks ended June 25, 2011 (Dollars in thousands )
	SCBU		KBU		CBU		Corporate			Eliminations			Consolidated
Sales to unaffiliated customers	$	705,872	$	882,701	$	350,443	$	—		$	—		$	1,939,016
Intersegment sales	$	333,790	$	157,476	$	73,938	$	—		$	(565,204	)	$	—
Net sales	$	1,039,662	$	1,040,177	$	424,381	$	—		$	(565,204	)	$	1,939,016
Income before taxes	$	193,160	$	93,951	$	41,899	$	(100,534	)	$	(25,078	)	$	203,398
Total assets	$	1,010,205	$	404,788	$	1,299,088	$	540,042		$	(379,701	)	$	2,874,422
Stock compensation	$	2,350	$	1,685	$	290	$	3,195		$	—		$	7,520
Interest expense	$	—	$	—	$	—	$	52,560		$	—		$	52,560
Property additions	$	128,398	$	18,893	$	18,756	$	14,936		$	—		$	180,983
Depreciation and amortization	$	31,692	$	7,215	$	31,169	$	9,687		$	—		$	79,763