News Column

KEURIG GREEN MOUNTAIN, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

May 7, 2014

The following discussion and analysis is intended to help you understand the results of operations and financial condition of Keurig Green Mountain, Inc., formerly known as Green Mountain Coffee Roasters, Inc., (together with its subsidiaries, the "Company", "Keurig", "we", "our", or "us"). You should read the following discussion and analysis in conjunction with our unaudited consolidated financial statements and related notes included elsewhere in this report. Overview We are a leader in the specialty coffee and coffeemaker businesses in the United States and Canada. We sell Keurig® Single Cup brewers and roast high-quality Arabica bean coffees including single-origin, Fair Trade Certified™, certified organic, flavored, limited edition and proprietary blends offered in K-Cup®, Vue® , and Rivo® packs ("packs") for use with our Keurig® Single Cup brewers. We also offer traditional whole bean and ground coffee in other package types including bags, fractional packages and cans. In addition, we produce and sell other specialty beverages in packs including hot apple cider, hot and iced teas, iced coffees, iced fruit brews, hot cocoa and other dairy-based beverages. Unless the context indicates otherwise, the terms "Keurig", the "Company", "we", "our", or "us" refer to Keurig Green Mountain, Inc., together with its subsidiaries. Products Packs In packs, we offer high-quality Arabica bean coffee including single-origin, Fair Trade Certified™, Rain Forest Alliance Certified™, organic, flavored, limited edition and proprietary blends. We carefully select our coffee beans and appropriately roast the coffees to optimize their taste and flavor differences. We manufacture and sell packs of our own brands and participating brands through licensing and manufacturing agreements. We offer brand choice such as Caribou Coffee®, Celestial Seasonings®, Dunkin' Donuts™, Eight O'Clock®, Emeril's®, Folgers Gourmet Selections®, Gloria Jean's®, Kirkland Signature™, Lavazza®, Lipton®, Millstone®, Newman's Own® Organics, Snapple®, Starbucks®, Swiss Miss®, Tetley® , Twinings of London®, and Wolfgang Puck®. We produce packs of tea through our own brands and has licensing agreements with Unilever North America (Lipton®), Celestial Seasonings, Inc. (Celestial Seasonings® branded teas and Perfect Iced Tea®), Good Earth®Corporation and Tetley® USA, Inc. (Good Earth® and Tetley® branded teas), R. C. Bigelow, Inc. (Bigelow® branded teas), Snapple Beverage Corp. (Snapple® branded teas), Starbucks Corporation (Tazo® and Teavana®) and Associated British Foods plc (Twinings of London®) for manufacturing, distribution, and sale of portion packs. In addition to coffee and tea, we also produce and sell portion packs for lemonade and hot apple cider under our Green Mountain Naturals™ brand, iced fruit brews under our Vitamin Burst™ brand, cocoa and other dairy-based beverages under our CafÉ Escapes™ brand, and cocoa under the Swiss Miss® brand. Brewers and Accessories We are a leader in sales of coffeemakers in the U.S. and Canada. As of the end of our 2013 fiscal year, we had the top four best-selling coffeemakers by dollar volume in the United States according to the NPD Group for consumer market research data in the United States. Under the Keurig® K-Cup®, Keurig® Vue®, and co-branded Keurig® Rivo™ brand names, we offer a variety of commercial and home use brewers for the AFH and AH channels differentiated by features and size. In addition, we have license agreements under which licensees manufacture, market and sell coffeemakers co-branded with "Keurig® Brewed". Licensees include Breville PTY Limited selling a "Breville®" branded brewer; Jarden Consumer Solutions selling a "Mr. Coffee®" branded brewer, and Conair Corporation selling a "Cuisinart®" branded brewer. We offer a variety of accessories for the Keurig® Single Cup Brewing platforms including K-Cup® and Vue® pack storage racks, baskets, and brewer carrying cases. We also sell other coffee-related equipment and accessories, gift assortments, hand-crafted items from coffee-source countries and gourmet food items covering a wide range of price points. Other Products We sell coffee in other package types in addition to packs such as bagged coffee and cans (for the grocery and mass channels) and fractional packages and ancillary products (for the office coffee and food service channels). We also earn royalties from licensees under various licensing agreements. 29 --------------------------------------------------------------------------------



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Over the last several years the primary growth in the coffee industry has come from the specialty coffee category, including demand for single serve coffee which can now be enjoyed in a wide variety of places, including home, office, professional, restaurants, and hospitality locations. This growth has been driven by the emergence of specialty coffee shops throughout the U.S. and Canada, the general level of consumer knowledge of, and appreciation for, coffee quality and variety, and the wider availability of high-quality coffee. We have been benefiting from this overall industry trend in addition to what we believe to be our carefully developed and distinctive advantages over our competitors. Our growth strategy involves developing and managing marketing programs to drive Keurig® Single Cup brewer adoption in order to generate ongoing demand for packs in American and Canadian households, foodservice and office location and, in the longer term, globally. As part of this strategy, we work to sell our at-home ("AH") brewers at attractive price points which are approximately at cost, or sometimes at a loss when factoring in the incremental costs related to sales, in order to drive the sales of profitable packs. In addition, we have license agreements with Breville PTY Limited (producer of Breville® brand coffeemakers), Jarden Consumer Solutions (producer of Mr. Coffee® brand coffeemakers), and Conair Corporation (producer of Cuisinart® brand coffeemakers), under which each produce, market and sell coffeemakers co-branded with Keurig®. In recent years, our growth has been driven predominantly by the growth and adoption of Keurig® Single Cup Brewing systems which includes both the brewer and related packs. In the second fiscal quarter of 2014, approximately 94% of our consolidated net sales were attributed to the combination of packs and Keurig® Single Cup brewers and related accessories.



We believe the primary consumer benefits delivered by our Keurig® Single Cup Brewing system are as follows:

1 Quality-expectations of the quality of coffee consumers drink has increased over the last several years and, we believe, with the Keurig® system, consumers can be certain they will get a high-quality, consistently produced beverage every time.



2 Convenience-the Keurig® system prepares beverages generally in less than a minute at the touch of a button with no mess, no fuss.

3 Choice-with many single serve beverage brands across multiple beverage categories, Keurig offers more than 290 individual varieties, allowing consumers to enjoy and explore a wide range of beverages. In addition to a variety of brands of coffee and tea, we also produce and sell iced teas, iced coffees, hot and iced fruit brews, hot cocoa and other dairy-based beverages, in packs. We see these benefits as being our competitive advantage and believe it's the combination of these attributes that make the Keurig® Single Cup Brewing system appealing to consumers. We are focused on building our brands and profitably growing our business. We believe we can continue to grow sales by increasing consumer awareness in the U.S. and Canada, expanding into new geographic regions, expanding consumer choice of coffee, tea and other beverages in our existing brewing systems and through the introduction of new brewing platforms, expanding sales in adjacent beverage industry segments and/or selectively pursuing other synergistic opportunities.



The key elements of our business strategy are as follows:

† Growing the current Keurig® Hot system in the U.S. and Canada; † Expanding our brand offerings, both owned and partner brands; † Expanding in current channels; † Launching new brewer technologies and innovation; † Beginning international expansion. Growing the current Keurig® Hot system in the United States and Canada. While we are positioned as a leader in the single serve hot beverage marketplace, we still have opportunities in the United States and Canada to increase household penetration. We are continuing to execute a segmentation strategy to effectively showcase our extensive variety of beverage options. We are also implementing measures to improve the shopping experience at retail to further distinguish the Keurig® brand and enhance brand recognition. Additionally, we are launching targeted marketing campaigns to increase regional household penetration in certain geographic areas through increased awareness, trial and conversion. Expanding our brand offering. We have continued to expand consumer choice in the Keurig® Hot system by entering into or extending a number of business relationships which enable us to offer other strong national and regional coffee and tea brands, and store brands such as Dunkin' DonutsTM, Seattle's Best Coffee®, Starbucks®, The Coffee Bean & Tea Leaf®, Cinnabon®, Krispy Kreme®, Peet's Coffee & Tea, Tazo®, Eight O'Clock®, Tetley®, Good Earth®, Snapple®, Kirkland SignatureTM and METRO's Irresistibles K-Cup® packs for use with Keurig® Single Cup brewers. We also continue to examine opportunities for business relationships with other strong national/regional brands including the potential for adding premium store-brand or co-branded packs to create additional single serve products that will help augment consumer demand for the Keurig® Single Cup Brewing systems. Furthermore, we are expanding the use of our Keurig® Single Cup Brewing system beyond beverages through innovative partnerships, the first of which is with the Campbell Soup Company to produce Campbell's Fresh-Brewed Soup K-Cup® packs which we announced in September 2013. 30

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As announced in February 2014, we signed a ten year agreement to collaborate on the development and introduction of the Coca-Cola Company's global brand and portfolio for use in our forthcoming Keurig ColdTM at-home beverage system. Under the collaboration arrangement, we are the Coca-Cola Company's exclusive partner for the production and sale of the Coca-Cola Company-branded single serve, pod-based cold beverages. We believe these new product offerings fuel excitement for current Keurig® Single Cup brewer owners and users; raise system awareness; attract new consumers to the system; and promote expanded use of the system. These relationships are established with careful consideration of potential economics. We expect to continue to enter into these relationships in our efforts to expand choice and diversify our portfolio of brands with the expectation that they will lead to increased Keurig® Single Cup Brewing system awareness and household adoption, in part through the participating brand's advertising and merchandising activities. Expanding in current channels. We have identified and are targeting specific opportunities within our existing channels, specifically the AFH channel, including food service, workplace, higher education and hospitality locations. These are areas where Keurig® has substantial room to grow, considering we are currently in less than one percent of food service outlets.



Launching new brewer technologies and innovation. We are also focused on continued innovation in both hot and cold single serve brewing systems. Some of our recent initiatives and planned product introductions include:

† An expansion of the Keurig® Hot system with the fiscal 2013 launch of the Keurig® Rivo® Cappuccino and Latte System and Rivo® pack espresso blend varieties, in partnership with Luigi Lavazza S.p.A. ("Lavazza"); † An expansion of the Keurig® Hot system with introduction of a new commercial grade Keurig® Bolt™ platform which, following in-office testing, is estimated to be available throughout the U.S. and Canada in fiscal 2014; † An introduction of the next generation beverage platform of the Keurig® Hot beverage system, which will combine the qualities and technologies of our existing K-Cup® and Vue® platforms to offer a wider array of beverages and available sizes, with an estimated launch in late fiscal 2014; and



† An estimated launch in fiscal 2015 of the Keurig ColdTM system, which will deliver freshly prepared carbonated, sparkling and still beverages.

Beginning international expansion. Beginning in fiscal 2014 and continuing into fiscal 2015, we are planning to launch our Keurig® Hot system global platform in targeted markets with the introduction of a specifically designed Keurig® Single Cup brewer.



Our business relationships with participating brands are generally established through licensing or manufacturing arrangements.

Under licensing arrangements, we license the right to manufacture, distribute and sell the finished products through our distribution channels using the brand owners' marks. For the right to use a brand owner's mark, we pay a royalty to the brand owner based on our sales of finished products that contain the brand owner's mark. Under manufacturing arrangements, we manufacture finished beverage products using raw materials sourced by us or provided by the brand owner. In both instances, once the manufacturing process is complete, we sell the finished product either to the brand owner or to our customers. Under certain manufacturing arrangements, our sole customer is the brand owner and we are prohibited from selling the beverage products to other types of customers through our distribution channels. Under other manufacturing arrangements, in addition to manufacturing the beverage for sale to the brand owner, we have the right to sell the beverages using the brand owner's marks in certain of our channels through a licensing arrangement, as described above. No individual licensing or manufacturing arrangement (including arrangements covering multiple brands) has generated net sales that have been significant to our consolidated net sales (i.e., no arrangement has accounted for more than 10% of our consolidated net sales in any period). We analyze the impact of each arrangement on consolidated net sales on an individual basis. We have determined that it is unlikely that we would lose our licensing or manufacturing rights to multiple brands at the same time. Each of our licensing and manufacturing arrangements are separately negotiated with unrelated parties, and each has distinct terms and conditions, including the duration of agreement and termination rights. Further, based upon the number of business relationships as well as the depth of our owned-brands, it is our belief that no individual business relationship is critical to the execution of our growth strategy. 31 --------------------------------------------------------------------------------



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Management is focused on executing our growth strategy to drive Keurig® Single Cup brewer adoption in households and offices in the U.S. and Canada in order to generate ongoing demand for packs. We compete not only with other widely advertised branded products, but also with private label or generic products that generally are sold at lower prices. In September 2012, two patents associated with our K-Cup® packs expired, and certain third-parties have launched competing products in the form of established unlicensed national and regional brands and unlicensed private label packs. For the second fiscal quarter of 2014, our net sales of $1,103.1 million represented growth of 10% over the second fiscal quarter of 2013 ("the prior year period"). Gross profit for the second fiscal quarter of fiscal 2014 was $457.4 million, or 41.5% of net sales, as compared to $415.1 million, or 41.3% of net sales for the prior year period. For the second fiscal quarter of 2014, selling, operating, and general and administrative expenses ("SG&A") decreased 3.0% to $196.9 million from $203.0 million for the prior year period. As a percentage of sales, SG&A expenses decreased to 17.9% in the second fiscal quarter of 2014 from 20.2% in the prior year period. Our operating margin improved to 23.6% in the second fiscal quarter of 2014 from 21.1% in the prior year period. We continually monitor all costs, including coffee, as we review our pricing structure as cyclical swings in commodity markets are common. The recent years have seen significant volatility in the "C" price of coffee (i.e., the price per pound quoted by the Intercontinental Exchange). We expect coffee prices to remain volatile in the coming years. We offer a one-year warranty on all Keurig® Single Cup brewers we sell and provide for the estimated cost of product warranties, primarily using historical information and current repair or replacement costs, at the time product revenue is recognized. In addition, sales of Keurig® Single Cup brewers are recognized net of an allowance for returns using an average return rate based on historical experience and an evaluation of contractual rights or obligations. We focus some of our research and development efforts on improving brewer reliability, strengthening its quality controls and product testing procedures. As we have grown, we have added significantly to our product testing, quality control infrastructure and overall quality processes. As we continue to innovate, and our products become more complex, both in design and componentry, product performance may modulate, causing warranty or sales returns rates to possibly fluctuate going forward. As a result, future warranty claims rates may be higher or lower than we are currently experiencing and for which we are currently providing for in our warranty or sales return reserves. We generated $593.6 million in cash from operating activities during the twenty-six weeks ended March 29, 2014 as compared to $604.7 million during the twenty-six weeks ended March 30, 2013. During the second quarter of fiscal 2014, we also completed a sale of our common stock resulting in proceeds of $1,243 million, net of transaction expenses. We used cash during the twenty-six weeks ended March 29, 2014 primarily to pay dividends of $37.2 million, fund capital expenditures of $119.0 million and repurchase shares of our common stock for $880.8 million. We routinely analyze our short-term and long-term cash requirements to continue to grow the business. In addition to funding share repurchases and cash dividends, we expect most of our cash generated from operations will continue to be used to fund capital expenditures and the working capital required for our growth over the next few years. Business Segments We have historically managed our 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, our Board of Directors authorized 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 the Domestic segment and the results of Canadian operations are in the "Canada" segment. As a result of the consolidation of U.S. operations, we have recast all historical segment results in order to provide data that is on a basis consistent with our new structure. See Note 3, Segment Reporting, of the Notes to Unaudited Consolidated Financial Statements included in this Quarterly Report. We evaluate the performance of our 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. Our 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 our 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 sustainability expenses, 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. 32 --------------------------------------------------------------------------------

Table of Contents Basis of Presentation Included in this presentation are discussions and reconciliations of net income and diluted earnings per share in accordance with accounting principles generally accepted in the United States of America ("GAAP") to net income and diluted earnings per share excluding certain expenses and losses. We refer to these performance measures as non-GAAP net income and non-GAAP net income per share. These non-GAAP measures exclude legal and accounting expenses related to the Securities and Exchange Commission ("SEC") inquiry and pending securities and stockholder derivative class action litigation and non-cash acquisition-related items such as amortization of identifiable intangibles, each of which include adjustments to show the tax impact of excluding these items. Each of these adjustments was selected because management uses these non-GAAP measures in discussing and analyzing its results of operations and because we believe the non-GAAP measures provide investors with greater transparency by helping to illustrate the underlying financial and business trends relating to our results of operations and financial condition and comparability between current and prior periods. For example, we excluded legal and accounting expenses related to the SEC inquiry and pending securities and stockholder derivative class action litigation because these expenses can vary from period to period and expenses associated with these activities are not considered a key measure of our operating performance. We use the non-GAAP measures to establish and monitor budgets and operational goals and to evaluate our performance. These non-GAAP measures are not in accordance with, or an alternative to, GAAP and should be considered in addition to, and not as a substitute or superior to, the other measures of financial performance prepared in accordance with GAAP. Using only the non-GAAP financial measures to analyze our performance would have material limitations because their calculation is based on the subjective determination of management regarding the nature and classification of events and circumstances that investors may find significant. We compensate for these limitations by presenting both the GAAP and non-GAAP measures of its results. 33 --------------------------------------------------------------------------------

Table of Contents Results of Operations



Summary financial data of the Company

The following table presents certain financial data of the Company expressed as a percentage of net sales for the periods denoted below:

Thirteen weeks ended Twenty-six weeks ended March 29, March 30, March 29, March 30, 2014 2013 2014 2013 Net sales 100.0 % 100.0 % 100.0 % 100.0 % Cost of sales 58.5 % 58.7 % 63.0 % 64.4 % Gross profit 41.5 % 41.3 % 37.0 % 35.6 %



Selling and operating expenses 11.3 % 12.4 % 11.8 %

12.7 % General and administrative expenses 6.5 % 7.8 % 5.7 % 6.1 % Operating income 23.6 %* 21.1 % 19.6 %* 16.8 % Other income, net 0.1 % 0.0 % 0.1 % 0.0 % Gain on financial instruments, net 0.3 % 0.3 % 0.3 % 0.2 % Loss on foreign currency, net (0.8 )% (0.6 )% (0.8 )% (0.4 )% Interest expense (0.3 )% (0.4 )% (0.2 )% (0.4 )% Income before income taxes 22.9 % 20.5 %* 18.9 %* 16.3 %* Income tax expense (8.2 )% (7.3 )% (6.9 )% (6.0 )% Net income 14.7 % 13.2 % 12.1 %* 10.3 % Net income attributable to noncontrolling interests 0.0 % 0.0 % 0.0 % 0.0 % Net income attributable to Keurig 14.7 % 13.2 % 12.1 % 10.2 %*



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* Does not sum due to rounding.

Segment Summary



Net sales and operating income for each of our operating segments are summarized in the tables below:

Net sales (in millions) Thirteen weeks ended Twenty-six weeks ended March 29, March 30, March 29, March 30, 2014 2013 2014 2013 Domestic $ 970.3$ 865.6$ 2,162.1$ 1,997.6 Canada 132.8 139.2 327.6 346.3 Total net sales $ 1,103.1$ 1,004.8$ 2,489.7$ 2,343.9 Operating income (loss) (in millions) Thirteen weeks ended Twenty-six weeks ended March 29, March 30, March 29, March 30, 2014 2013 2014 2013 Domestic $ 278.0$ 239.9$ 510.8$ 430.9 Canada 20.8 20.2 52.7 46.2 Corporate (38.3 ) (48.1 ) (76.4 ) (82.6 ) Total operating income $ 260.5$ 212.0$ 487.1$ 394.5 34

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Thirteen weeks ended March 29, 2014 as compared to the thirteen weeks ended March 30, 2013

Revenue Company Summary The following table presents consolidated net sales by major product category: Net sales (in millions) Thirteen weeks ended March 29, March 30, $ Increase % Increase 2014 2013 (Decrease) (Decrease) Packs $ 898.2$ 794.0$ 104.2 13 % Brewers and accessories 137.6 126.8 10.8 9 % Other products 67.3 84.0 (16.7 ) (20 )% Total net sales $ 1,103.1$ 1,004.8$ 98.3 10 % Net sales for the second quarter of fiscal 2014 increased by $98.3 million, or 10%, to $1,103.1 million as compared to the prior year period. The 10% increase includes the unfavorable impact of foreign currency exchange rates which reduced net sales by approximately 1%. The primary drivers of the 10% increase in our net sales as compared to the prior year period were (i) a $104.2 million, or 13%, increase in total pack net sales and (ii) a $10.8 million, or 9%, increase in Keurig® Single Cup brewer and accessory net sales, both of which were partially offset by a $16.7 million, or 20%, decrease in other product net sales. The increase in pack net sales as compared to the prior year period was driven by (i) a 15 percentage point increase due to volume and (ii) a 2 percentage point increase due to pack mix, both of which were partially offset by a 4 percentage point decrease due to net price realization and the impact of foreign currency exchange rates. During the second quarter of fiscal 2014, the positive mix was attributable to the fact that we sold more packs to retailers and consumers, where there is a higher wholesale average selling price, than to brand owners, where there is a lower wholesale selling price. We anticipate this increase in net sales due to mix change to fluctuate and we don't view mix results for the second quarter of fiscal 2014 as indicative of any particular trend. The increase in brewer and accessory net sales as compared to the prior year period was primarily driven by a 29 percentage point increase in brewer sales volume, partially offset by (i) an 18 percentage point decrease due to brewer net price realization resulting from a strategic decision to drive brewer volume to further expand the installed base of our Keurig® hot platform and (ii) a 2 percentage point decrease due to brewer product mix. The decrease in brewer mix is due to selling fewer higher priced brewers than lower priced brewers in the second quarter of fiscal 2014 as compared to the prior year period. Additionally, accessory net sales increased by approximately $0.5 million, or 3 percentage points over the prior year period.



Net sales of other products declined $16.7 million, or 20%, in the quarter over the prior year period primarily due to the continuing demand shift from traditional coffee package format to packs.

Domestic Domestic segment net sales increased by $104.7 million, or 12%, to $970.3 million in the second quarter of fiscal 2014 as compared to $865.6 million in the prior year period. The increase is due primarily to a $96 million, or 13%, increase related to net sales of packs. CanadaCanada segment net sales decreased by $6.4 million, or 5%, to $132.8 million in the second quarter of fiscal 2014 as compared to $139.2 million in the prior year period. Excluding an $11.7 million or 8% decrease related to the unfavorable impact of foreign currency exchange rates, net sales increased by $5.3 million primarily due to (i) a $3.4 million, or 28%, decrease related to net sales of Keurig® Single Cup brewers and accessories, and (ii) a $6.1 million, or 12%, decrease in net sales of other products, such as coffee sold in traditional package formats, both of which were offset by a $14.8 million, or 20% increase in net sales of packs driven by a demand shift from coffee sold in traditional package formats to packs. 35 --------------------------------------------------------------------------------

Table of Contents Gross Profit Gross profit for the second quarter of fiscal 2014 was $457.4 million, or 41.5% of net sales as compared to $415.1 million, or 41.3% of net sales, in the prior year period. The increase in gross margin in the second quarter of fiscal 2014 compared to the prior year period was primarily attributable to an increase of approximately 440 basis points related to a decrease in green coffee costs, which was partially offset by (i) a decrease of approximately 150 basis points related to net price realization primarily associated with packs; (ii) a decrease of approximately 80 basis points associated with manufacturing lines that were disassembled, and (iii) a decrease of approximately 100 basis points related to net price realization primarily associated with brewers. Some components from the disassembled lines are being used for new product platform manufacturing development.



Selling, Operating, General and Administrative Expenses

SG&A expenses decreased by 3.0% to $196.9 million in the second quarter of fiscal 2014 from $203.0 million in the prior year period. SG&A expenses as a percentage of net sales decreased to 17.9% in the second quarter of fiscal 2014 from 20.2% in the prior year period. The decrease in SG&A over the prior year period is primarily attributed to a decrease in marketing, other selling, operating, general and administrative expenses, primarily consulting expenses, partially offset by an increase in expenses related to research and development.



Segment Operating Income (Loss)

Operating income for the Domestic segment increased by $38.1 million, or 16%, primarily attributable to higher sales volume for packs and brewers as well as lower green coffee costs. Operating income for the Canada segment increased by $0.6 million, or 3%, primarily attributable to lower green coffee costs, partially offset by the impact of unfavorable fluctuations in foreign exchange rates. The operating loss for Corporate - Unallocated decreased by $9.8 million, or 20%, primarily due to decreased expenses related to consulting.



Gain on Financial Instruments, Net

We recorded $2.9 million in net gains on financial instruments not designated as hedges for accounting purposes during the second quarter of fiscal 2014 as compared to $3.5 million in net gains during the prior year period. The net gains were primarily attributable to our cross currency swap, which hedges the risk in currency movements on an intercompany note denominated in Canadian currency.



Loss on Foreign Currency, Net

We have certain assets and liabilities that are denominated in Canadian currency. During the second quarter of fiscal 2014, we incurred net foreign currency losses of approximately $8.7 million as compared to net losses of $6.1 million during the prior year period. The net foreign currency losses primarily related to re-measurement of certain intercompany notes with our foreign subsidiaries which fluctuate due to the relative strength or weakness of the U.S. dollar against the Canadian dollar. Interest Expense Interest expense was $3.0 million in the second quarter of fiscal 2014, as compared to $3.8 million in the prior year period. The decrease in interest expense was primarily due to lower average outstanding debt in the second quarter of fiscal 2014 as compared to the average outstanding debt during the prior year period. Income Taxes Our effective income tax rate was 35.8% for the second quarter of fiscal 2014 as compared to a 35.6% effective tax rate for the prior year period. The effective tax rate for the prior year period was impacted primarily by discrete items including a $2.9 million research and development catch-up adjustment due to the enactment on January 2, 2013 of the American Taxpayer Relief Act of 2012 and the release of a $2.2 million uncertain tax position on which the statue of limitations had expired. The effective tax rate for the second quarter of fiscal 2014 was primarily impacted by the release of a $3.4 million uncertain tax position due to the expiration of the statute of limitations and a $3.6 million stock option deduction. 36 --------------------------------------------------------------------------------



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Net Income, Non-GAAP Net Income and Diluted Earnings Per Share ("EPS")

Net income in the second quarter of fiscal 2014 was $162.1 million, an increase of $29.7 million or 22%, as compared to $132.4 million in the prior year period.

Non-GAAP net income (when excluding legal and accounting expenses related to the SEC inquiry and pending securities and stockholder derivative class action litigation as well as non-cash related items such as amortization of identifiable intangibles) increased 20% to $169.8 million for the second quarter of fiscal 2014 from $140.9 million non-GAAP net income in the prior year period.



Diluted EPS was $1.03 per share in the second quarter of fiscal 2014, as compared to $0.87 per share in the prior year period.

Non-GAAP diluted EPS was $1.08 per share in the second quarter of fiscal 2014, as compared to $0.93 per share in the prior year period.

The following tables show a reconciliation of net income and diluted EPS to non-GAAP net income and non-GAAP diluted EPS for the thirteen weeks ended March 29, 2014 and March 30, 2013 (in thousands, except per share data):

Thirteen weeks ended March 29, 2014 March 30, 2013 Net income attributable to Keurig $ 162,084 $



132,421

After tax: Expenses related to SEC inquiry (1) 348



672

Amortization of identifiable intangibles (2) 7,334



7,826

Non-GAAP net income attributable to Keurig $ 169,766$ 140,919 Thirteen weeks ended March 29, 2014 March 30, 2013 Diluted income per share $ 1.03 $ 0.87 After tax: Expenses related to SEC inquiry (1) 0.00



0.00

Amortization of identifiable intangibles (2) 0.05 0.05 Non-GAAP net income per share $ 1.08 $ 0.93 *



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* Does not sum due to rounding.

(1) Represents legal and accounting expenses, net of income taxes of $0.2 million and $0.4 million for each of the thirteen weeks ended March 29, 2014 and March 30, 2013, respectively, related to the SEC inquiry and pending securities and stockholder derivative class action litigation classified as general and administrative expense. See Note 14, Legal Proceedings, of the Notes to Unaudited Consolidated Financial Statements included in this Quarterly Report. Income taxes were calculated at our effective tax rate. (2) Represents the amortization of intangibles, net of income taxes of $3.5 million and $3.6 million for each of the thirteen weeks ended March 29, 2014 and March 30, 2013, respectively, related to our acquisitions classified as general and administrative expense. Income taxes were calculated at our deferred tax rates. 37

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Twenty-six weeks ended March 29, 2014 as compared to the twenty-six weeks ended March 30, 2013

Revenue Company Summary The following table presents consolidated net sales by major product category: Net Sales (in millions) Twenty-six weeks ended March 29, March 30, $ Increase % Increase 2014 2013 (Decrease) (Decrease) Packs $ 1,829.5$ 1,657.7$ 171.8 10 % Brewers and accessories 512.7 504.1 8.6 2 % Other products 147.5 182.1 (34.6 ) (19 )% Total net sales $ 2,489.7$ 2,343.9$ 145.8 6 % Net sales for the twenty-six weeks ended March 29, 2014 (the "2014 YTD period") increased by $145.8 million, or 6%, to $2,489.7 million, as compared to $2,343.9 million reported for the twenty-six weeks ended March 30, 2013 ("the prior YTD period"). The 6%, increase includes the unfavorable impact of foreign currency exchange rates which reduced net sales by approximately 1%. The primary drivers of the 6% increase in our net sales over the prior YTD period were a $171.8 million, or 10%, increase in total pack net sales and an $8.6 million, or 2%, increase in Keurig® Single Cup brewer and accessory sales, both of which were offset by a $34.6 million, or 19%, net decrease in other products.



The increase in pack net sales over the prior YTD period was driven by a 13 percentage point increase due to volume, and was offset by a 3 percentage point decrease due to net price realization and the impact of foreign currency exchange rates.

The increase in brewer and accessory net sales over the prior YTD period was primarily driven by an 11 percentage point increase due to brewer sales volume, and was offset by (i) a 6 percentage point decrease due to brewer net price realization resulting from a strategic decision to drive brewer volume to further expand the installed base of our Keurig® hot platform and (ii) a 2 percentage point decrease due to brewer product mix. The decrease in mix is primarily due to selling fewer higher priced brewers than lower priced brewers in the second quarter of fiscal 2014 as compared to the prior quarter. Additionally, accessory net sales declined by approximately $4.7 million, or 12 percentage points over the prior YTD period.



Net sales of other products declined $34.6 million, or 19%, in the quarter over the prior YTD period primarily due to the continuing demand shift from traditional coffee package format to packs.

Domestic



Domestic segment net sales increased by $164.6 million, or 8%, to $2,162.1 million in the 2014 YTD period as compared to $1,997.5 million in the prior YTD period. The increase is due primarily to a $154 million, or 10%, increase related to sales of packs.

CanadaCanada segment net sales decreased by $18.7 million, or 5%, to $327.6 million in the 2014 YTD period, as compared to $346.3 million in the prior YTD period. Excluding an $22.0 million, or 6%, decrease related to the unfavorable impact of foreign currency exchange rates, net sales increased by $3.3 million primarily due to (i) a $10.5 million, or 16%, decrease related to net sales of Keurig® Single Cup brewers and accessories, and (ii) a $16.7 million, or 14%, decrease in net sales of other products, such as coffee sold in traditional package formats, both of which were offset by a $30.5 million, or 19% increase in net sales of packs driven by a demand shift from coffee sold in traditional package formats to packs. Gross Profit Gross profit for the 2014 YTD period was $921.5 million, or 37.0% of net sales, as compared to $834.3 million, or 35.6% of net sales, in the prior year period. The increase in gross margin over the prior YTD period was primarily attributable to an increase of approximately 410 basis points due to a decrease in green coffee costs partially offset by (i) a decrease of approximately 120 basis points due to lower net price realization primarily associated with packs, (ii) a decrease of approximately 70 basis points due to increased manufacturing overhead, and (iii) a decrease of approximately 70 basis points due to lower net price realization primarily associated with brewers. Some components from the disassembled lines are being used for new product platform manufacturing development. 38

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Selling, Operating, General and Administrative Expenses

SG&A expenses decreased 1% to $434.4 million in the 2014 YTD period from $439.8 million in the prior YTD period. SG&A expenses as a percentage of net sales decreased to 17.4% in the 2014 YTD period from 18.8% in the prior YTD period. The decrease in SG&A over the prior YTD period is primarily attributed to decreased marketing, other selling, operating, general and administrative expenses, primarily consulting expenses, partially offset by increased expenses related to research and development.



Segment Operating Income (Loss)

Operating income for the Domestic segment increased by $79.9 million, or 19%, primarily attributable to higher sales volume for packs and brewers as well as lower green coffee costs. Operating income for the Canada segment increased by $6.5 million, or 14%, primarily attributable to lower green coffee costs and a reduction in professional and administrative expenses, partially offset by the impact of unfavorable fluctuations in foreign exchange rates. The operating loss for Corporate - Unallocated decreased by $6.2 million, or 7%, primarily due to decreased expenses related to consulting.



Gain on Financial Instruments

We recorded $7.5 million in net gains on financial instruments not designated as hedges for accounting purposes during the 2014 YTD period as compared to $4.6 million in net gains during the prior YTD period. For both the 2014 and prior YTD periods, the net gains and losses were primarily attributable to our cross currency swap, which hedges the risk in currency movements on an intercompany note denominated in Canadian currency. Loss on Foreign Currency, Net We have certain assets and liabilities that are denominated in Canadian currency. During the 2014 YTD period, we incurred a net foreign currency loss of $19.3 million as compared to a net loss of $8.8 million during the prior YTD period. The net foreign currency loss and gain were primarily attributable to re-measurement of certain intercompany notes with our foreign subsidiaries which fluctuate due to the relative strength or weakness of the U.S. dollar against the Canadian dollar. Interest Expense Interest expense was $5.6 million in the 2014 YTD period, as compared to $9.5 million in the prior YTD period. The decrease in interest expense was primarily due to lower average outstanding debt during the twenty-six weeks ended March 29, 2014 as compared to the average outstanding debt during the prior year period. Income Taxes Our effective income tax rate was 36.2% for the 2014 YTD period, as compared to a 36.9% effective tax rate in the prior YTD period. The lower effective tax rate for the 2014 YTD period was due primarily to increased stock option deductions and the expiration of the statute of limitations on uncertain tax positions.



Net Income, Non-GAAP Net Income and Diluted Earnings Per Share ("EPS")

Net income in the 2014 YTD period was $300.3 million, an increase of $60.3 million or 25%, as compared to $240.0 million in the prior YTD period.

Non-GAAP net income (when excluding legal and accounting expenses related to the SEC inquiry and pending securities and stockholder derivative class action litigation as well as non-cash related items such as amortization of identifiable intangibles) increased 23% to $315.9 million for the 2014 YTD period from $256.9 million non-GAAP net income in the prior YTD period.

Diluted EPS was $1.94 per share in the 2014 YTD period, as compared to $1.57 per share in the prior YTD period.

Non-GAAP diluted EPS was $2.04 per share in the 2014 YTD period, as compared to $1.68 per share in the prior YTD period.

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The following tables show a reconciliation of net income and diluted EPS to non-GAAP net income and non-GAAP diluted EPS for the twenty-six weeks ended March 29, 2014 and March 30, 2013 (in thousands, except per share data):

Twenty-six weeks ended March 29, 2014 March 30, 2013 Net income attributable to Keurig $ 300,311 $



240,004

After tax: Expenses related to SEC inquiry (1) 584



1,116

Amortization of identifiable intangibles (2) 14,976



15,777

Non-GAAP net income attributable to Keurig $ 315,871$ 256,897 Twenty-six weeks ended March 29, 2014 March 30, 2013 Diluted income per share $ 1.94 $ 1.57 After tax: Expenses related to SEC inquiry (1) 0.00



0.01

Amortization of identifiable intangibles (2) 0.10 0.10 Non-GAAP net income per share $ 2.04 $ 1.68

-------------------------------------------------------------------------------- (1) Represents legal and accounting expenses, net of income taxes of $0.3 million and $0.6 million for the twenty-six weeks ended March 29, 2014 and March 30, 2013, respectively, related to the SEC inquiry and pending securities and stockholder derivative class action litigation classified as general and administrative expense. See Note 14, Legal Proceedings, of the Notes to Unaudited Consolidated Financial Statements included in this Quarterly Report. Income taxes were calculated at our effective tax rate. (2) Represents the amortization of intangibles, net of income taxes of $7.0 million and $7.2 million for the twenty-six weeks ended March 29, 2014 and March 30, 2013, respectively, related to our acquisitions classified as general and administrative expense. Income taxes were calculated at our deferred tax rates.



Liquidity and Capital Resources

We have principally funded our operations, working capital needs, capital expenditures and share repurchases from net cash flows from operating activities, proceeds from sales of our common stock, borrowings under our credit facilities and capital lease and financing obligations. During the second quarter of fiscal 2013, we received $1,243 million, net of transaction-related expenses, from the issuance of 16,684,139 shares of common stock to Atlantic Industries, a wholly owned subsidiary of the The Coca-Cola Company. At March 29, 2014, we had $269.1 million in outstanding debt and capital lease and financing obligations, $1,112.2 million in cash and cash equivalents and $1,591.1 million of working capital (including cash). At September 28, 2013, we had $251.0 million in outstanding debt and capital lease and financing obligations, $260.1 million in cash and cash equivalents and $924.4 million of working capital (including cash). As of March 29, 2014, we had approximately $184.5 million of undistributed international earnings, most of which are Canadian-sourced. With the exception of the repayment of intercompany debt, all earnings of our foreign subsidiaries are considered indefinitely reinvested and no U.S. deferred taxes have been provided on those earnings. If these amounts were distributed to the U.S. in the form of dividends or otherwise, we would be subject to additional U.S. income taxes, which could be material. Determination of the amount of any unrecognized deferred income tax on these earnings is not practicable because such liability, if any, is dependent on circumstances existing if and when remittance occurs. Additionally, we had $61.2 million of cash and cash equivalents as of March 29, 2014 held in international jurisdictions which will be used to fund capital and other cash requirements of international operations, primarily held by our Canadian business. Operating Activities:



Net cash provided by operating activities is principally comprised of net income and is primarily affected by the net change in working capital and non-cash items relating to depreciation and amortization.

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Net cash provided by operating activities during the twenty-six weeks ended March 29, 2014 was $593.6 million as compared to $604.7 million for the prior year period. We generated $300.8 million in net income for the twenty-six weeks ended March 29, 2014. We incurred non-cash expenses of $126.2 million primarily related to depreciation and amortization. Other significant changes in assets and liabilities affecting net cash provided by operating activities were decrease in inventories of $219.4 million offset by a decrease in accounts payable and accrued expenses of $83.1 million. Investing Activities:



Investing activities primarily include capital expenditures for equipment and building improvements.

Capital expenditures were $119.0 million for the twenty-six weeks ended March 29, 2014 as compared to $148.3 million for the prior year period. Capital expenditures incurred on an accrual basis during the twenty-six weeks ended March 29, 2014 consisted primarily of $21.8 million related to increasing packaging capabilities for Keurig® beverage platforms, $49.8 million related to facilities and related infrastructure, $33.9 million related to information technology infrastructure and systems and $36.5 million for new product platforms. Of the $49.8 million in capital expenditures related to facilities and related infrastructure, $25.4 million relates to fixed assets acquired under capital lease and financing obligations. In fiscal 2014, we currently expect to invest between $350.0 million to $400.0 million in capital expenditures to support our future growth. Financing Activities: Cash provided by financing activities for the twenty-six weeks ended March 29, 2014 totaled $390.0 million. We received $1,243 million, net of transaction-related expenses from the issuance of 16,684,139 shares of common stock to Atlantic Industries, a wholly owned subsidiary of the The Coca-Cola Company. We used $880.8 million of cash to fund share repurchase activity under our existing authorized share repurchase programs during the twenty-six weeks ended March 29, 2014. Cash flows from operating and financing activities included a $46.2 million tax benefit primarily from the exercise of non-qualified options and disqualifying dispositions of incentive stock options. As stock is issued from the exercise of options and the vesting of restricted stock units and performance stock units, we will continue to receive proceeds and a tax deduction where applicable; however we cannot predict either the amounts or the timing of any such proceeds or tax benefits. Long Term Debt Under our Amended and Restated Credit Agreement ("Restated Credit Agreement"), we maintain senior secured credit facilities consisting of (i) an $800.0 million U.S. revolving credit facility, (ii) a $200.0 million alternative currency revolving credit facility, and (iii) a term loan A facility. At March 29, 2014, we had $167.8 million outstanding under the term loan A facility, no balances outstanding under the revolving credit facilities and $6.2 million in letters of credit with $993.8 million available for borrowing. The Restated Credit Agreement also provides for an increase option for an aggregate amount of up to $500.0 million. The term loan A facility requires quarterly principal repayments. The term loan and revolving credit borrowings bear interest at a rate equal to an applicable margin plus, at our option, either (a) a eurodollar rate determined by reference to the cost of funds for deposits for the interest period and currency relevant to such borrowing, adjusted for certain costs, or (b) a base rate determined by reference to the highest of (1) the federal funds rate plus 0.50%, (2) the prime rate announced by Bank of America, N.A. from time to time and (3) the eurodollar rate plus 1.00%. The applicable margin under the Restated Credit Agreement with respect to the term loan A and revolving credit facilities is a percentage per annum varying from 0.5% to 1.0% for base rate loans and 1.5% to 2.0% for eurodollar rate loans, based upon our leverage ratio. Our average effective interest rate as of March 29, 2014 and September 28, 2013 was 3.6% and 3.5%, respectively, excluding amortization of deferred financing charges and interest on capital leases and financing obligations, and including the effect of interest rate swap agreements. We also pay a commitment fee on the average daily unused portion of the revolving credit facilities. All of our assets and the assets of our wholly owned material subsidiaries are pledged as collateral under the Restated Credit Agreement. The Restated Credit Agreement contains customary negative covenants, subject to certain exceptions, including limitations on: liens; investments; indebtedness; mergers and consolidations; asset sales; dividends and distributions or repurchases of our capital stock; transactions with affiliates; certain burdensome agreements; and changes in our lines of business. 41 --------------------------------------------------------------------------------



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The Restated Credit Agreement requires us to comply on a quarterly basis with a consolidated leverage ratio and a consolidated interest coverage ratio. At March 29, 2014, we were in compliance with these covenants. In addition, the Restated Credit Agreement contains certain mandatory prepayment requirements and customary events of default. Interest Rate Swaps We are party to interest rate swap agreements, the effect of which is to limit the interest rate exposure on a portion of the loans under our credit facilities to a fixed rate versus the 30-day Libor rate. The total notional amount of these swaps at March 29, 2014 was $130.0 million. The fair market value of the interest rate swaps is the estimated amount that we would receive or pay to terminate the agreements at the reporting date, taking into account current interest rates and the credit worthiness of the counterparty. At March 29, 2014, we estimate we would have paid $4.8 million (gross of tax), if we terminated the interest rate swap agreements. We designate the interest rate swap agreements as cash flow hedges and the changes in the fair value of these derivatives are classified in accumulated other comprehensive income (a component of equity). During each of the thirteen weeks ended March 29, 2014 and March 30, 2013, we incurred $0.8 million in additional interest expense pursuant to interest rate swap agreements. Common Stock Sales On February 27, 2014, we sold 16,684,139 shares of common stock to Atlantic Industries, an indirect wholly owned subsidiary of The Coca-Cola Company, at $74.98 per share for an aggregate purchase price of $1,251 million, pursuant to a common stock purchase agreement dated February 5, 2014. In addition, pursuant to pre-emptive rights set forth in the Common Stock Purchase Agreement ("CSPA") between us and Luigi Lavazza S.p.A ("Lavazza) dated August 10, 2010, we agreed not to sell or issue any shares of Common Stock for a period of five years and six months after September 28, 2010 without first offering Lavazza the opportunity to purchase an amount of newly issued securities. In accordance with the CSPA, Lavazza is entitled to maintain its current percentage ownership of our outstanding common stock as of immediately prior to the closing of any common stock issuance, on terms and conditions not less favorable than those proposed for such offering, including price. As a result of the February 27, 2014 issuance of common stock to Atlantic Industries described above, on March 28, 2014, we entered into a common stock purchase agreement with Lavazza to sell 1,407,000 shares of our common stock to Lavazza at $74.98 per share for an aggregate purchase price of $105.5 million. The transaction closed on April 17, 2014.



Share Repurchases and Dividends

On July 30, 2012, our Board of Directors authorized a program (the "2012 Share Repurchase Program") for us to repurchase up to $500.0 million of our common shares over two years, at such times and prices as determined by our management. On November 19, 2013, our Board of Directors approved and authorized the repurchase, on or prior to December 1, 2015, of up to an aggregate amount of $1.0 billion of our outstanding common shares (the "2013 Share Repurchase Program"), at such times and prices as determined by our management. The 2013 Share Repurchase Program became effective upon completion of the 2012 Share Repurchase Program in March 2014. As of March 29, 2014 we have $354.4 million remaining under the 2013 Share Repurchase Program and additional repurchases will be made with cash on hand, cash from operations and funds available through our existing credit facility. See Note 12, Stockholders' Equity, of the Notes to Unaudited Consolidated Financial Statements included in this Quarterly Report. On February 28, 2014, we entered into an accelerated share repurchase ("ASR") agreement with a major financial institution ("Bank") pursuant to the 2012 and 2013 Share Repurchase Programs. The ASR allows us to buy a large number of shares immediately at a purchase price determined by an average market price over a period of time. Under the ASR, we agreed to purchase $700.0 million of its common stock, in total, with an initial delivery to us of 4,340,508 shares ("Initial Shares") of our common stock by the Bank. The Initial Shares represent the number of shares at the current market price equal to 70% of the total fixed purchase price of $700.0 million. The repurchased shares were retired and returned to an unissued status. The remainder of the total purchase price of $210.0 million reflects the value of the stock held by the Bank pending final settlement and, accordingly, was recorded as a reduction to additional paid-in capital. Final settlement of the ASR will occur no sooner than November 24, 2014 and no later than February 27, 2015 at the Bank's discretion. Upon settlement of the ASR, the total shares repurchased by us will be determined based on a share price equal to the daily volume weighted-average price ("VWAP") of our common stock during the term of the ASR program, less a fixed per share discount amount. At settlement, the Bank will deliver additional shares to us in the event total shares are greater than the 4,340,508 shares initially delivered, and we will issue additional shares to the Bank in the event total shares are less than the shares initially delivered. The receipt or issuance of additional shares will result in a reclassification between additional paid-in capital and common stock equal to the par value of the additional shares received or issued. The number of shares that we may be required to issue to the Bank is limited to 10.0 million shares under the ASR. As announced on May 7, 2014, our Board of Directors authorized a program for the Company to repurchase up to an additional $1.0 billion of the Company's common stock over two years, at such time and prices as determined by the Company's management. This authorization is in addition to the remaining $354.4 million as of March 29, 2014 on the previously authorized $1.0 billion authorization from November 2013. 42

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During the second quarter of fiscal 2014, we declared a quarterly dividend of $0.25 per common share, or $40.5 million in the aggregate payable on May 2, 2014 to shareholders of record on April 5, 2014. During the second quarter of fiscal 2014, we paid a quarterly dividend of $0.25 per common share, or $37.2 million in the aggregate, to shareholders of record on January 17, 2014, in connection with the quarterly regular dividend declared on November 19, 2013. On May 5, 2014, our Board of Directors declared our next regular quarterly cash dividend of $0.25 per common share, payable on August 1, 2014, to shareholder of record as of the close of business on July 3, 2014.



No cash dividends were paid or declared in fiscal 2013.

We believe that our cash flows from operating activities, existing cash and our credit facilities will provide sufficient liquidity to pay all liabilities in the normal course of business, fund anticipated capital expenditures, service debt requirements through the next 12 months, fund any purchases of our common shares under the repurchase programs authorized by the Board of Directors and pay dividends. We continuously evaluate our capital requirements and access to capital. We may opt to raise additional capital through equity and/or debt financing to provide flexibility to assist with managing several risks and uncertainties inherent in a growing business including potential future acquisitions or increased capital expenditure requirements. A summary of cash requirements related to our outstanding long-term debt, future minimum lease payments and purchase commitments is as follows (in thousands): Capital Operating Lease Financing Long-Term Interest Lease



Obligations Obligations Purchase

Debt Expense (1) Obligations (2) (3) Obligations Total Remainder of 2014 $ 6,445$ 2,947$ 9,139$ 1,599 $ 922 $ 579,822$ 594,991 FY 2015 - FY 2016 159,325 7,666 29,299 7,676 18,240 671,214 885,740 FY 2017 - FY 2018 872 76 15,550 7,676 19,245 550,762 594,181 Thereafter 223 9 21,145 31,978 113,723 44,043 211,121 Total $ 166,865$ 10,698$ 75,133$ 48,929$ 152,130$ 1,845,841$ 2,286,033



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(1) Based on rates in effect at March 29, 2014.

(2) Includes principal and interest payments under capital lease obligations.

(3) Represents portion of the future minimum lease payments allocated to the building which will be recognized as reductions to the financing obligation and interest expense upon completion of construction. In addition, we have $20.1 million in unrecognized tax benefits primarily as the result of acquisitions of which we are indemnified for $12.6 million expiring through June 2015. We are unable to make reasonably reliable estimates of the period of cash settlement, if any, due to the uncertain nature of the unrecognized tax benefits.



Recent Accounting Pronouncements

In April 2014, the Financial Accounting Standards Board, ("FASB") issued an Accounting Standards Update ("ASU") No. 2014-08, "Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity," which raises the threshold for disposals to qualify as discontinued operations. A discontinued operation is defined as: (1) a component of an entity or group of components that has been disposed of or classified as held for sale and represents a strategic shift that has or will have a major effect on an entity's operations and financial results; or (2) an acquired business that is classified as held for sale on the acquisition date. ASU 2014-08 also requires additional disclosures regarding discontinued operations, as well as material disposals that do not meet the definition of discontinued operations. It is effective for annual periods beginning on or after December 15, 2014. Early adoption is permitted but only for disposals that have not been reported in financial statements previously issued. The adoption of ASU 2014-08 is not expected to have a material impact on our net income, financial position or cash flows. 43 --------------------------------------------------------------------------------



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In July 2013, the FASB issued ASU No. 2013-11, "Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists" ("ASU 2013-11"). ASU 2013-11 was issued to eliminate diversity in practice regarding the presentation of unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. Under ASU 2013-11, an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. Otherwise, to the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The amendments in this ASU will become effective beginning in fiscal 2015. The adoption of ASU 2013-11 is not expected to have a material impact on our net income, financial position or cash flows. In March 2013, the FASB issued ASU No. 2013-05, "Foreign Currency Matters (Topic 830): Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity" ("ASU 2013-05"). ASU 2013-05 provides clarification regarding whether Subtopic 810-10, Consolidation - Overall, or Subtopic 830-30, Foreign Currency Matters - Translation of Financial Statements, applies to the release of cumulative translation adjustments into net income when a reporting entity either sells a part or all of its investment in a foreign entity or ceases to have a controlling financial interest in a subsidiary or group of assets that constitute a business within a foreign entity. The amendments in this ASU will become effective beginning in fiscal 2015. The adoption of ASU 2013-05 is not expected to have a material impact on our net income, financial position or cash flows. In February 2013, the FASB issued ASU No. 2013-04, "Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date" ("ASU 2013-04"). ASU 2013-04 provides guidance for the recognition, measurement and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this ASU is fixed at the reporting date. The guidance requires an entity to measure those obligations as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors as well as any additional amount the reporting entity expects to pay on behalf of its co-obligors. ASU 2013-04 also requires an entity to disclose the nature and amount of those obligations. The amendments in this ASU will become effective beginning in fiscal 2015. The adoption of ASU 2013-04 is not expected to have a material impact on our net income, financial position or cash flows.



Factors Affecting Quarterly Performance

Our business is subject to seasonal fluctuations, including fluctuations resulting from the holiday season. As a result, total inventory, and specifically, brewers and accessories finished goods inventory is considerably higher during the last fiscal quarter than other quarters during the fiscal year, as we prepare for the holiday season. Due to the shift in product mix toward brewers and accessories in the first quarter of our fiscal year, gross margin, as a percentage of net sales, is typically lower in the first fiscal quarter than in the remainder of the fiscal year. Historically, in addition to variations resulting from the holiday season, we have experienced variations in sales from quarter-to-quarter due to a variety of other factors including, but not limited to, the cost of green coffee, competitor initiatives, marketing programs and weather. Because of the seasonality of our business, results for any quarter are not necessarily indicative of the results that may be achieved for the full fiscal year. 44

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Table of Contents Forward-Looking Statements Certain information in this filing constitutes "forward-looking statements." Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include words such as "believes," "expects," "anticipates," "estimates," "intends," "plans," "seeks" or words of similar meaning, or future or conditional verbs, such as "will," "should," "could," "may," "aims," "intends," or "projects." However, the absence of these words or similar expressions does not mean that a statement is not forward-looking. These statements may relate to: the expected impact of raw material costs and our pricing actions on our results of operations and gross margins, expected trends in net sales and earnings performance and other financial measures, the expected productivity and working capital improvements, the success of introducing and producing new product offerings, the impact of foreign exchange fluctuations, the adequacy of internally generated funds and existing sources of liquidity, such as the availability of bank financing, the expected results of operations of businesses acquired by us, our ability to issue debt or additional equity securities, our expectations regarding purchasing shares of our common stock under the existing authorizations, projections of payment of dividends, and the impact of the inquiry initiated by the SEC and any related litigation or additional governmental inquiry or enforcement proceedings, as well as litigation asserting claims against us under the federal antitrust laws and various state laws. A forward-looking statement is neither a prediction nor a guarantee of future events or circumstances, and those future events or circumstances may not occur. Management believes that these forward-looking statements are reasonable as and when made. However, caution should be taken not to place undue reliance on any such forward-looking statements because such statements speak only as of the date when made. We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In addition, forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections. These risks and uncertainties include, but are not limited to, those described in Part I, "Item 1A. Risk Factors," and Part II "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in our fiscal 2013 Annual Report filed on Form 10-K, as amended, and elsewhere in this report and those described from time to time in our future reports filed with the Securities and Exchange Commission. 45 --------------------------------------------------------------------------------



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