Product Warranties

9 Months Ended

Jun. 23, 2012

Product Warranties

Product Warranties

8.Product Warranties

The Company offers a one-year warranty on all Keurig® Single Cup brewers it sells.  KBU provides for the estimated cost of product warranties, primarily using historical information and repair or replacement costs, at the time product revenue is recognized.  The Company is experiencing warranty claims at a lower rate than the rates experienced over the prior two years, which had related primarily to a component failing at higher-than-anticipated rates in the later stage of the warranty life.  The current rates reflect an improvement in later-stage brewer performance.  Management believes that the lower rates are the result of improvements made in units produced since mid-2011 that incorporated an updated component that improved later-stage performance.  The Company has incorporated the recent improvement in the rate of warranty claims into its estimates used in its reserve for product warranty costs.  However, because brewer failures may arise in the later part of the warranty period, actual warranty costs may exceed the reserve.  As a result, there can be no assurance that the Company will not need to increase the reserve or experience additional warranty expense related to this or other quality issues in future periods.  At this time, management believes that the warranty rates used and related reserves are appropriate.

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 tend to modulate, causing warranty rates to possibly fluctuate going forward, so that they may be higher or lower than the Company is currently experiencing and for which the Company is currently providing for in its warranty reserve.

The changes in the carrying amount of product warranties for the thirteen and thirty-nine weeks ended June 23, 2012 and June 25, 2011 are as follows (in thousands):

	Thirteen weeks ended						Thirty-nine weeks ended
	June 23, 2012			June 25, 2011			June 23, 2012			June 25, 2011
Balance, beginning of period	$	25,740		$	15,715		$	14,728		$	6,694
Provision charged to income	2,605			6,177			38,425			27,788
Usage	(8,962		)	(6,837		)	(33,770		)	(19,427		)
Balance, end of period	$	19,383		$	15,055		$	19,383		$	15,055

For the thirteen and thirty-nine weeks ended June 23, 2012, the Company recorded recoveries of $0.2 million and $8.3 million, respectively, under an agreement with a supplier.  The recoveries were recorded as a reduction to warranty expense and are not reflected in the provision charged to income in the table above.  There were no recoveries for the thirteen and thirty-nine weeks ended June 25, 2011.