Segment Reporting

9 Months Ended

Jun. 25, 2011

Segment Reporting

Segment Reporting

3. Segment Reporting

The Company manages its operations through three operating segments, the Specialty Coffee business unit ("SCBU"), the Keurig business unit ("KBU") and the Canadian business unit ("CBU") created primarily from the recently acquired Van Houtte business.

SCBU sources, produces and sells coffee, cocoa, teas and other beverages in K-Cup^® portion 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 primarily to wholesale channels, including supermarkets and convenience stores, restaurants and hospitality, office coffee distributors and directly to consumers in North America. In addition, SCBU sells Keurig^® Single-Cup Brewing systems and other accessories to supermarkets and directly to consumers.

KBU, a pioneer and leading manufacturer of gourmet single-cup brewing systems, targets its premium patented single-cup brewing systems for use both at-home ("AH") and away-from-home ("AFH"), mainly in North America. KBU sells AH single-cup brewers, accessories and coffee, tea, cocoa and other beverages in K-Cup^® portion packs produced mainly by SCBU and CBU to retailers 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 K-Cup^® portion packs directly to consumers. KBU earns royalty income from K-Cup^® portion packs when shipped by its third party licensed roasters, except for shipments of K-Cup^® portion 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^® portion packs when shipped by SCBU and CBU.

CBU sources, produces and sells coffees in a variety of packaging formats, including K-Cup^® portion packs, whose brands include Van Houtte^®, Brûlerie St. Denis^®, Brûlerie Mont-Royal^® and Orient Express^® and its licensed Bigelow^® and Wolfgang Puck^® brands. These varieties are sold primarily to wholesale channels, including supermarkets and retail, and through office coffee services to offices, convenience stores and restaurants mainly throughout North America. The CBU segment also includes the Van Houtte U.S. Coffee Service business ("Filterfresh") which is currently classified as held for sale (see Note 8, Assets Held For Sale). CBU also manufactures brewing equipment and is responsible for all Company coffee brand sales in the grocery channel in Canada.

The Company evaluates performance based on several factors, including business segment income before taxes. The operating segments do not share any significant manufacturing or distribution facilities. Administrative functions such as accounting and information services are mainly decentralized, but currently maintain some centralization through an enterprise shared services group. The costs of the Company's manufacturing operations are captured within the SCBU and CBU segments. The KBU segment does not have manufacturing facilities and purchases its saleable products from third parties, including the SCBU and CBU. The Company's inventory and accounts receivable are captured and reported discretely within each operating segment.

Expenses related to certain centralized administrative functions including Finance, Human Resources, Information System Technology and Legal are allocated to the SCBU and KBU operating segments. Expenses not specifically related to the SCBU, KBU or CBU operating segments 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 our 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. Corporate assets include primarily cash, short-term investments, deferred tax assets, income tax receivable, notes receivable, deferred issuance costs and fixed assets. Corporate total assets as of June 26, 2010 have been revised to include deferred issuance costs and fixed assets to reflect the current presentation. In addition, beginning with the first quarter of fiscal 2011, the Company determined that because the KBU segment includes all of the assets of Keurig, Incorporated, it would no longer include the Company's net investment in Keurig, Incorporated in Corporate total assets. Accordingly, Corporate total assets and eliminations were each reduced by $10.7 million to remove the Company's net investment in Keurig, Incorporated. This allocation had no effect on consolidated total assets.

Goodwill and intangibles related to the Frontier, Tully's, Timothy's and Diedrich acquisitions are included in the SCBU segment. Keurig related goodwill and intangibles are included in the KBU segment. Van Houtte related goodwill and intangibles are included in the CBU segment.

The Company analyzes its business and records net sales on a segment basis and eliminates intersegment sales as part of its financial consolidation process. Intersegment sales primarily consist of SCBU and CBU sales of K-Cup^® portion packs to KBU, KBU sales of single-cup brewers to SCBU and CBU, and through the second quarter of fiscal 2011 KBU royalty income from K-Cup^® portion packs when shipped by SCBU and CBU.

Thirteen weeks ended June 25, 2011

As described in the Company's Annual Report on Form 10-K for the fifty-two weeks ended September 25, 2010 Item 9A. Controls and Procedures, management's planned actions to remediate the material weakness related to the financial consolidation process included a thorough review of the processes and procedures used in the Company's intercompany accounting, including an evaluation of possible methods to simplify and automate certain aspects related to intercompany transactions. As a result of this review, 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 K-Cup^® portion packs, thus removing the need to eliminate royalty income during the financial consolidation process.

In addition, while previously the Company recorded intersegment sales and purchases of brewers and K-Cup^® portion packs at a markup, during the third quarter of fiscal 2011, the Company unified the standard costs of brewer and K-Cup^® portion pack inventories across the segments and began recording intersegment sales and purchases of brewers and K-Cup^® portion 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^® portion packs during the third quarter of fiscal 2011, the Company's segment inventories were revalued and an adjustment was recorded by the respective segments which resulted in an increase in cost of sales and a decrease in inventories. This adjustment was offset with 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 above changes were not retrospectively applied to prior periods. The following represents the approximate net effect of the above changes on the segments income before taxes (in thousands) for the third quarter in fiscal 2011. The net effect was calculated by comparing the simplified method of recording intersegment sales described previously to the historical method of recording intersegment sales. For purposes of estimating intersegment sales with mark-up, the Company applied historical gross margin factors to third quarter inter-segment sales. Historical royalty rates were used to calculate intersegment royalty income.

	Increase (decrease) in Income before taxes
SCBU	$	14,279
KBU		(11,615	)
CBU		(1,433	)
Corporate		—
Eliminations		(1,231	)
Consolidated	$	—

Selected financial data for segment disclosures for the thirteen weeks ended June 25, 2011 and June 26, 2010 are as follows:

Thirteen weeks ended June 25, 2011

(Dollars in thousands)

	SCBU		KBU		CBU		Corporate			Eliminations			Consolidated
Sales to unaffiliated customers	$	296,861	$	305,421	$	114,928	$	—		$	—		$	717,210
Intersegment sales	$	80,482	$	3,320	$	17,942	$	—		$	(101,744	)	$	—
Net sales	$	377,343	$	308,741	$	132,870	$	—		$	(101,744	)	$	717,210
Income before taxes	$	73,438	$	44,765	$	13,450	$	(42,905	)	$	—		$	88,748
Total assets	$	1,153,511	$	425,473	$	1,135,210	$	540,042		$	(379,814	)	$	2,874,422
Stock compensation	$	968	$	669	$	147	$	1,219		$	—		$	3,003
Interest expense	$	—	$	—	$	—	$	29,830		$	—		$	29,830
Property additions	$	72,939	$	8,580	$	8,040	$	2,596		$	—		$	92,155
Depreciation and amortization	$	13,364	$	2,551	$	11,516	$	3,548		$	—		$	30,979

Thirteen weeks ended June 26, 2010

(Dollars in thousands)

(As Restated)

	SCBU		KBU		CBU		Corporate			Eliminations			Consolidated
Sales to unaffiliated customers	$	157,169	$	159,414	$	—	$	—		$	—		$	316,583
Intersegment sales	$	68,475	$	39,955	$	—	$	—		$	(108,430	)	$	—
Net sales	$	225,644	$	199,369	$	—	$	—		$	(108,430	)	$	316,583
Income before taxes	$	27,691	$	23,720	$	—	$	(10,328	)	$	(4,620	)	$	36,463
Total assets	$	846,879	$	353,966	$	—	$	57,069		$	(65,009	)	$	1,192,905
Stock compensation	$	645	$	565	$	—	$	883		$	—		$	2,093
Interest expense	$	—	$	—	$	—	$	1,495		$	—		$	1,495
Property additions	$	27,970	$	4,284	$	—	$	2,636		$	—		$	34,890
Depreciation and amortization	$	8,146	$	2,021	$	—	$	1,838		$	—		$	12,005

Selected financial data for segment disclosures for the thirty-nine weeks ended June 25, 2011 and June 26, 2010 are as follows:

Thirty-nine weeks ended June 25, 2011

(Dollars in thousands)

	SCBU		KBU		CBU		Corporate			Eliminations			Consolidated
Sales to unaffiliated customers	$	769,506	$	934,543	$	234,967	$	—		$	—		$	1,939,016
Intersegment sales	$	369,683	$	157,476	$	34,946	$	—		$	(562,105	)	$	—
Net sales	$	1,139,189	$	1,092,019	$	269,913	$	—		$	(562,105	)	$	1,939,016
Income before taxes	$	216,081	$	96,687	$	15,816	$	(100,534	)	$	(24,652	)	$	203,398
													$	—
Total assets	$	1,153,511	$	425,473	$	1,135,210	$	540,042		$	(379,814	)	$	2,874,422
Stock compensation	$	2,418	$	1,685	$	222	$	3,195					$	7,520
Interest expense	$	—	$	—	$	—	$	52,560		$	—		$	52,560
Property additions	$	129,335	$	18,893	$	17,819	$	14,936		$	—		$	180,983
Depreciation and amortization	$	38,268	$	7,215	$	24,593	$	9,687		$	—		$	79,763

Thirty-nine weeks ended June 26, 2010

(Dollars in thousands)

(As Restated)

	SCBU		KBU		CBU		Corporate			Eliminations			Consolidated
Sales to unaffiliated customers	$	445,517	$	538,171	$	—	$	—		$	—		$	983,688
Intersegment sales	$	194,461	$	112,720	$	—	$	—		$	(307,181	)	$	—
Net sales	$	639,978	$	650,891	$	—	$	—		$	(307,181	)	$	983,688
Income before taxes	$	86,772	$	50,769	$	—	$	(32,302	)	$	(11,736	)	$	93,503
Total assets	$	846,879	$	353,966	$	—	$	57,069		$	(65,009	)	$	1,192,905
Stock compensation	$	1,966	$	1,563	$	—	$	2,412		$	—		$	5,941
Interest expense	$	—	$	—	$	—	$	3,376		$	—		$	3,376
Property additions	$	61,273	$	12,173	$	—	$	10,980		$	—		$	84,426
Depreciation and amortization	$	19,535	$	5,486	$	—	$	4,855		$	—		$	29,876