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 the Canadian business unit. Effective as of and as initially disclosed on May 8, 2013, the Company’s Board of Directors authorized and approved a reorganization which consolidated U.S. operations to bring greater organizational efficiency and coordination across the Company. Due to this combination, the results of U.S. operations, formerly reported in the SCBU and KBU segments, are reported in one segment (“Domestic”) and the results of Canadian operations are reported in the “Canada” segment. The Company’s Chief Executive Officer (“CEO”) serves as the Company’s chief operating decision maker (“CODM”) and there are two operating and reportable segments, Domestic and Canada.

Effective for the quarter ended June 29, 2013, as a result of the consolidation of U.S. operations, the Company has recast all historical segment results in order to provide data that is on a basis consistent with the Company’s new structure, remove total assets from the Company’s segment disclosures as only consolidated asset information is provided to and used by the CODM for use in decision making (in connection with the reorganization, segment asset information is neither provided to nor used by the CODM), and reflect all corporate social responsibility expenses in Corporate as the Company no longer allocates those expenses to its operating segments.

The Company distributes its products in two channels: at-home (“AH”) and away-from-home (“AFH”).

The Domestic segment sells single cup brewers, accessories, and sources, produces and sells coffee, hot cocoa, teas and other beverages in K-Cup® and Vue® packs (“single serve packs”) and coffee in more traditional packaging including bags and fractional packs 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 Company websites. 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 AH channel. The Domestic segment also earns royalty income from K-Cup® packs sold by a third party licensed roaster.

The Canada segment 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, the Canada segment sells the Keurig® K-Cup® Single Cup brewers, accessories and coffee, tea, and other beverages in K-Cup® packs to retailers, department stores and mass merchandisers in Canada for the AH channels; manufactures certain brewing equipment; and is responsible for all of the Company’s coffee brand sales in the grocery channel in Canada. The Canada 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 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, corporate social responsibility expenses, interest expense not directly attributable to an operating segment, the majority of foreign exchange gains or losses, legal expenses and compensation of the Board of Directors. The Company does not disclose assets or property additions by segment as only consolidated asset information is provided to the CODM for use in decision making.

Effective for the first quarter of 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 (loss). Prior to the first quarter of fiscal 2013, the Company 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. The CODM measures segment performance based upon operating income which excludes interest expense and interest expense is not provided to the CODM by segment. Accordingly, interest expense by segment is no longer presented.

Sales between operating segments are transacted at cost. As a result, intersegment sales have no impact on operating income and effective for the first quarter of fiscal 2013, the Company no longer discloses intersegment sales. Net sales for the thirteen and thirty-nine weeks ended June 29, 2013 and comparative historical periods include only net sales to external customers.

The following tables summarize selected financial data for segment disclosures for the thirteen and thirty-nine weeks ended June 29, 2013 and June 23, 2012:

	Thirteen weeks ended June 29, 2013
	(Dollars in thousands)
	Domestic		Canada		Corporate Unallocated			Consolidated
Net sales	$	822,593	$	144,479	$	—		$	967,072

Operating income (loss)	$	213,076	$	23,658	$	(43,390	)	$	193,344

Stock compensation	$	2,615	$	515	$	3,001		$	6,131

Depreciation and amortization	$	44,083	$	16,501	$	625		$	61,209

	Thirteen weeks ended June 23, 2012
	(Dollars in thousands)
	Domestic		Canada		Corporate Unallocated			Consolidated
Net sales	$	719,771	$	149,423	$	—		$	869,194

Operating income (loss)	$	125,368	$	21,933	$	(17,573	)	$	129,728

Stock compensation	$	2,011	$	379	$	2,030		$	4,420

Depreciation and amortization(1)	$	29,452	$	15,421	$	1		$	44,874

(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 June 23, 2012, filed on August 1, 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 $5.3 million that should have been reported under the operating segments was reported in Corporate. 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.

	Thirty-nine weeks ended June 29, 2013
	(Dollars in thousands)
	Domestic		Canada		Corporate Unallocated			Consolidated
Net Sales	$	2,820,123	$	490,800	$	—		$	3,310,923

Operating income (loss)	$	644,024	$	69,855	$	(125,990	)	$	587,889

Stock compensation	$	7,808	$	1,870	$	11,525		$	21,203

Depreciation and amortization	$	121,675	$	48,938	$	1,355		$	171,968

	Thirty-nine weeks ended June 23, 2012
	(Dollars in thousands)
	Domestic		Canada		Corporate Unallocated			Consolidated
Net Sales	$	2,437,935	$	474,527	$	—		$	2,912,462

Operating income (loss)	$	423,228	$	60,327	$	(58,396	)	$	425,159

Stock compensation	$	6,147	$	1,504	$	5,978		$	13,629

Depreciation and amortization(1)	$	78,963	$	44,751	$	3		$	123,717

(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 June 23, 2012, filed on August 1, 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 $14.4 million for the thirty-nine weeks ended June 23, 2012 that should have been reported under the operating segments was reported in Corporate. 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						Thirty-nine weeks ended
	June 29, 2013			June 23, 2012			June 29, 2013			June 23, 2012
Operating income	$	193,344		$	129,728		$	587,889		$	425,159
Other income, net	237			229			652			1,589
Gain (loss) on financial instruments, net	4,419			3,032			8,994			(214		)
(Loss) gain on foreign currency, net	(10,391		)	(5,068		)	(19,185		)	1,231
Gain on sale of subsidiary	—			—			—			26,311
Interest expense	(3,937		)	(6,157		)	(13,481		)	(18,662		)
Income before income taxes	$	183,672		$	121,764		$	564,869		$	435,414