4. Segment Reporting

The Company has historically managed its operations through three business segments: the Specialty Coffee business unit (“SCBU”), the Keurig business unit (“KBU”) and CBU. The Company announced on May 8, 2013, that effective May 8, 2013, the SCBU and KBU segments were combined to bring greater organizational efficiency and coordination across the Company. Due to this combination, the results of the SCBU and KBU segments will be reported as a consolidated segment beginning in the third quarter of fiscal 2013, and prior periods will be recast.

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, convenience stores, restaurants and hospitality, office coffee distributors, and directly to consumers in the United States. In addition, SCBU sells at-home (“AH”) Keurig® Single Cup Brewing systems and other accessories to supermarkets and directly to consumers, and away-from-home (“AFH”) Keurig® Single Cup Brewing systems to distributors for use primarily in offices.

KBU targets its premium patented single cup brewing systems for use AH 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 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.

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. In addition, CBU sells the Keurig® K-Cup® Single Cup Brewing system, accessories and coffee, tea, and other beverages in K-Cup® packs to retailers, department stores and mass merchandisers in Canada for the AH channels. CBU also manufactures brewing equipment and is responsible for all of the Company’s coffee brand sales in the grocery channel in Canada. The CBU segment included Filterfresh through October 3, 2011, the date of sale (see Note 3, Divestitures).

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 as part of the financial consolidation process. Operating income represents gross profit less selling, operating, general and administrative expenses. 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 and accounting functions are primarily decentralized, but currently maintain some centralization through an enterprise shared services group. Expenses consisting primarily of compensation and depreciation 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 for corporate headquarters, 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.

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, fixed assets, goodwill, and other intangible assets. Corporate assets primarily include cash, short-term investments, deferred tax assets, income taxes receivable, intercompany notes receivable that are eliminated in consolidation, deferred issuance costs, and fixed assets related to information system technology and corporate headquarters. Goodwill and intangibles related to acquisitions are included in their respective segments.

Effective for fiscal 2013, the Company changed its measure for reporting segment profitability and for evaluating segment performance and the allocation of Company resources from income before taxes to operating income. Historically, the Company has disclosed each operating and reporting segment’s income before taxes to report segment profitability. Segment disclosures for prior periods have been recast to reflect operating income by segment in place of income before taxes.

Sales between operating segments are transacted at cost. As a result, intersegment sales have no impact on operating income and the Company no longer discloses intersegment sales. Net sales for the thirteen and twenty-six weeks ended March 30, 2013 and comparative historical periods include only net sales to external customers.

Effective at the beginning of fiscal year 2013, the Company consolidated the AFH selling teams in the United States from the SCBU segment and the KBU segment into one organization and implemented a team approach to customers who purchase significant volumes of both brewers and single serve packs. Due to the consolidation, the results of the AFH channel are now reported in the SCBU segment. The Company did not change its operating or reportable segments and the management structure remains the same with the President of each business unit reporting directly to our Chief Executive Officer. Prior periods were not recast as the changes resulting from the consolidation of the AFH channel in the SCBU segment did not materially affect the trends in asset balances or in reported results for either SCBU or KBU for any quarterly or year-to-date period. The AFH net sales reported in the KBU segment for thirteen and twenty-six weeks ended March 24, 2012 was approximately $18.7 million and $43.2 million, respectively. The AFH operating income reported in the KBU segment for the thirteen and twenty-six weeks ended March 24, 2012 was approximately $0.8 million and $4.2 million, respectively.

The following tables summarize selected financial data for segment disclosures for the thirteen and twenty-six weeks ended March 30, 2013 and March 24, 2012:

	Thirteen weeks ended March 30, 2013
	(Dollars in thousands)
	SCBU		KBU		CBU		Corporate			Eliminations			Consolidated
Net sales	$	517,460	$	348,135	$	139,197	$	—		$	—		$	1,004,792

Operating income (loss)	$	163,453	$	66,815	$	19,122	$	(37,286	)	$	—		$	212,104

Total assets	$	1,478,110	$	935,518	$	1,098,463	$	759,060		$	(780,941	)	$	3,490,210

Stock compensation	$	1,542	$	1,132	$	930	$	5,358		$	—		$	8,962

Interest expense	$	928	$	387	$	741	$	2,388		$	(630	)	$	3,814

Property additions	$	14,579	$	13,153	$	4,930	$	22,044		$	—		$	54,706

Depreciation and amortization	$	31,503	$	7,097	$	16,279	$	535		$	—		$	55,414

	Thirteen weeks ended March 24, 2012
	(Dollars in thousands)
	SCBU		KBU		CBU		Corporate			Eliminations			Consolidated
Net sales	$	385,263	$	362,844	$	136,945	$	—		$	—		$	885,052

Operating income (loss)	$	97,016	$	49,878	$	12,281	$	(9,582	)	$	—		$	149,593

Total assets	$	1,383,754	$	716,069	$	1,129,883	$	653,369		$	(573,868	)	$	3,309,207

Stock compensation	$	1,146	$	1,105	$	800	$	2,642		$	—		$	5,693

Interest expense	$	—	$	—	$	—	$	6,042		$	—		$	6,042

Property additions	$	106,354	$	8,599	$	8,280	$	23,825		$	—		$	147,058

Depreciation and amortization(1)	$	21,306	$	5,517	$	14,955	$	1		$	—		$	41,779

(1) Reported segment depreciation and amortization has been revised to reflect depreciation expense for Information Systems Technology (“IST”) equipment that was allocated to operating segments in each segment’s income before taxes. In the Company’s Quarterly Report on Form 10-Q for the thirteen weeks ended March 24, 2012, filed on May 2, 2012, IST equipment depreciation expense was appropriately allocated, recorded and reported on a consolidated basis and in each operating segment’s income before taxes; however, on the depreciation and amortization line, IST equipment depreciation of $4.9 million that should have been reported under the operating segments was reported in the Corporate segment. The historical issues with the depreciation and amortization lines did not impact the segment reporting for any other line items, including operating income. Management believes the revision to operating segments’ depreciation and amortization was not material.

	Twenty-six weeks ended March 30, 2013
	(Dollars in thousands)
	SCBU		KBU		CBU		Corporate			Eliminations			Consolidated
Net Sales	$	1,042,017	$	955,513	$	346,321	$	—		$	—		$	2,343,851

Operating income (loss)	$	315,373	$	100,270	$	44,351	$	(65,449	)	$	—		$	394,545

Total assets	$	1,478,110	$	935,518	$	1,098,463	$	759,060		$	(780,941	)	$	3,490,210

Stock compensation	$	3,173	$	2,020	$	1,355	$	8,524		$	—		$	15,072

Interest expense	$	2,073	$	387	$	1,845	$	6,580		$	(1,341	)	$	9,544

Property additions	$	54,280	$	25,089	$	9,241	$	36,822		$	—		$	125,432

Depreciation and amortization	$	64,475	$	13,117	$	32,437	$	730		$	—		$	110,759

	Twenty-six weeks ended March 24, 2012
	(Dollars in thousands)
	SCBU		KBU		CBU		Corporate			Eliminations			Consolidated
Net Sales	$	753,850	$	964,314	$	325,104	$	—		$	—		$	2,043,268

Operating income (loss)	$	188,463	$	97,091	$	37,782	$	(27,905	)	$	—		$	295,431

Total assets	$	1,383,754	$	716,069	$	1,129,883	$	653,369		$	(573,868	)	$	3,309,207

Stock compensation	$	2,261	$	1,875	$	1,125	$	3,948		$	—		$	9,209

Interest expense	$	—	$	—	$	—	$	12,505		$	—		$	12,505

Property additions	$	193,783	$	15,652	$	25,415	$	32,937		$	—		$	267,787

Depreciation and amortization(1)	$	39,038	$	10,473	$	29,330	$	2		$	—		$	78,843

(1) Reported segment depreciation and amortization has been revised to reflect depreciation expense for IST equipment that was allocated to operating segments in each segment’s income before taxes. In the Company’s Quarterly Report on Form 10-Q for the thirteen weeks ended March 24, 2012, filed on May 2, 2012, IST equipment depreciation expense was appropriately allocated, recorded and reported on a consolidated basis and in each operating segment’s income before taxes; however, on the depreciation and amortization line, IST equipment depreciation of $9.1 million for the twenty-six weeks ended March 24, 2012 that should have been reported under the operating segments was reported in the Corporate segment. The historical issues with the depreciation and amortization lines did not impact the segment reporting for any other line items, including operating income. Management believes the revision to operating segments’ depreciation and amortization was not material.

The following table reconciles the total segment operating income to consolidated income before income taxes, as presented in the Unaudited Consolidated Statements of Operations (in thousands):

	Thirteen weeks ended						Twenty-six weeks ended
	March 30, 2013			March 24, 2012			March 30, 2013			March 24, 2012
Operating income	$	212,104		$	149,593		$	394,545		$	295,431
Other income, net	227			669			415			1,360
Gain (loss) on financial instruments, net	3,471			(2,112		)	4,575			(3,246		)
(Loss) gain on foreign currency, net	(6,115		)	3,613			(8,794		)	6,299
Gain on sale of subsidiary	—			—			—			26,311
Interest expense	(3,814		)	(6,042		)	(9,544		)	(12,505		)
Income before income taxes	$	205,873		$	145,721		$	381,197		$	313,650