Keurig Green Mountain, Inc.
KEURIG GREEN MOUNTAIN, INC. (Form: 10-K, Received: 11/19/2015 06:11:31)

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TABLE OF CONTENTS
Item 8. Financial Statements and Supplementary Data

Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)
ý   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

 

 

For the fiscal year ended September 26, 2015

OR

o

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

 

 

For the transition period from                to                

Commission file number 1-12340

LOGO

KEURIG GREEN MOUNTAIN, INC.
(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of incorporation or organization)
  03-0339228
(I.R.S. Employer Identification No.)

33 Coffee Lane, Waterbury, Vermont 05676
(Address of principal executive offices) (zip code)

(802) 244-5621
(Registrants' telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report.)

Securities registered pursuant to Section 12(b) of the Act:

    Title of each class       Name of each exchange on which registered    
    Common Stock, $0.10 par value per share       The Nasdaq Global Select Market    

Securities registered pursuant to Section 12(g) of the Act: NONE

         Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ý     No  o

         Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  o     No  ý

         Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý     No  o

         Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý     No  o

         Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

         Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer   ý       Accelerated filer   o

Non-accelerated filer

 

o

 

 

 

Smaller Reporting Company

 

o

         Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o     No  ý

         The aggregate market value of the voting stock of the registrant held by non-affiliates of the registrant on March 28, 2015 was approximately $17,377,984,000 based upon the closing price of such stock on March 27, 2015.

         As of November 13, 2015, 148,926,020 shares of common stock of the registrant were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

         Portions of the registrant's definitive Proxy Statement for the 2016 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Form 10-K, are incorporated by reference in Part III, Items 10-14 of this Form 10-K.


Table of Contents


KEURIG GREEN MOUNTAIN, INC,

Annual Report on Form 10-K

For

Fiscal Year Ended September 26, 2015

Table of Contents

PART I

  1

Item 1.

 

Business

  1

Item 1A.

 

Risk Factors

  12

Item 1B.

 

Unresolved Staff Comments

  25

Item 2.

 

Properties

  25

Item 3.

 

Legal Proceedings

  25

Item 4.

 

Mine Safety Disclosures

  25


PART II


 

26

Item 5.

 

Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Securities

  26

Item 6.

 

Selected Financial Data

  29

Item 7.

 

Management's Discussion and Analysis of Financial Condition and Results of Operations

  30

Item 7A.

 

Quantitative and Qualitative Disclosures about Market Risk

  52

Item 8.

 

Financial Statements and Supplementary Data

  56

Item 9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

  118

Item 9A.

 

Controls and Procedures

  118

Item 9B.

 

Other Information

  119


PART III


 

120

Item 10.

 

Directors, Executive Officers and Corporate Governance

  120

Item 11.

 

Executive Compensation

  120

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

  120

Item 13.

 

Certain Relationships and Related Transactions, and Director Independence

  120

Item 14.

 

Principal Accounting Fees and Services

  120


PART IV


 

121

Item 15.

 

Exhibits, Financial Statement Schedules

  121

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PART I

FORWARD-LOOKING STATEMENTS

        This report contains information that 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, estimates of future financial results, 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, 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, the impact of pending and future stockholder claims and other litigation, and the impact of pending antitrust litigation against the Company in the United States and Canada. 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 Company's 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" and elsewhere in this report and those described from time to time in our future reports filed with the Securities and Exchange Commission.

Item 1.    Business

Overview

        We believe that we are a leader in coffeemakers and specialty coffee in the United States and Canada. We consider ourselves an innovative, technology-driven, values-based personal beverage system company. Our multi-brand beverage and beverage system portfolio is aimed at changing the way consumers prepare and enjoy coffee and other beverages both at home and away from home. We develop and sell a variety of Keurig® brewers and, in addition to specialty coffee, produce and sell a variety of other specialty beverages in pods (including hot apple cider, hot and iced teas, iced coffees, iced fruit brews, hot cocoa and other beverages) for use with our Keurig® hot brewing systems. We also offer traditional whole bean and ground coffee in other package types including bags, fractional packages and cans. We market and sell our products 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 our Company websites. We have differentiated our Company and our Keurig® brand with our ability to partner with other beverage brand companies in order to bring consumers significant beverage and brand choice in our Keurig® brewing systems. We currently offer more than 575 beverage varieties and over 80 brands as part of the Keurig® system. Unless the context indicates otherwise, the terms "Keurig", the "Company", "we", "our", or "us" refer to Keurig Green Mountain, Inc., together with its subsidiaries.

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        During our 2015 fiscal year, we had the top seven best-selling coffeemakers by dollar volume in the United States according to the NPD Group for consumer market research data. Under the Keurig® brand name, we offer a variety of hot system brewers for commercial use in the Away From Home ("AFH") channel and for home use in the At Home ("AH") channel that are differentiated by features and size.

        In recent years, growth in the coffee industry has come primarily from the specialty coffee category throughout the U.S. and Canada. Single-serve has been the fastest growing segment of the specialty coffee category. Concurrently, consumers are more frequently seeking to enjoy premium experiences within the comfort and convenience of their own homes, including the consumption of specialty coffee. In addition to what we believe to be our carefully developed and distinctive advantages over our competitors, the Company has been benefiting from these broad consumer trends.

        We have license agreements under which licensees manufacture, market and sell coffeemakers co-branded as "Keurig® Brewed". Licensees include Conair Corporation (producer of Cuisinart® brand coffeemakers) through May 2016, Jarden Consumer Solutions (producer of Mr. Coffee® brand coffeemakers), and GE Appliances selling a "GE Café™" series refrigerator which includes a built in Keurig® K-Cup® brewing system.

        Our business has been driven predominantly by an increase in adoption of Keurig® hot brewing systems, which include both the brewer, related pods and accessories. In fiscal 2015, approximately 95% of our consolidated net sales were attributed to the combination of pods and Keurig® hot brewing systems and related accessories.

        While our historic growth has been primarily a result of Keurig® hot brewing systems, we have been developing the Keurig® Kold™ beverage system for more than six years. During fiscal 2015, we continued to work towards commercializing the Keurig® Kold™ beverage system, which we launched on a limited basis in the first quarter of fiscal 2016. We believe the Keurig® Kold™ beverage system shares the same elements as the Keurig® hot beverage system: quality, convenience, choice and simplicity. The Keurig® Kold™ beverage system mixes and dispenses a wide variety of cold still and carbonated beverages, in a countertop footprint, using a Kold™ beverage pod. Kold™ beverage brands include partner brands with The Coca-Cola Company and Dr Pepper Snapple Group, as well as our own brands. We expect to add additional beverage brands and new partners in the future. In the near term, we do not expect the Keurig® Kold™ beverage system to be profitable or for revenue from the Keurig® Kold™ beverage system to be material to the Company.

        In support of the manufacturing of Keurig® Kold™ single-serve pods, in fiscal 2015 we completed construction on our first Keurig® Kold™ pod production lines within one of our existing facilities in Vermont. Additionally, during fiscal 2015, we completed construction on a 585,000 square foot facility in Lithia Springs, Georgia that will be dedicated to Keurig® Kold™ pod production as demand requires.

        Our business strategy involves using our consumer insights to develop innovative new brewing systems and beverages; continually improving and refining our current systems and beverages, and; developing and managing marketing programs to drive Keurig® brewing system adoption in order to generate ongoing demand for pods. We currently target opportunities primarily in American and Canadian households, food service, and office locations. Over the longer term, we are also working to expand our addressable opportunities globally. As part of our strategy, we sell multiple at-home hot brewers at attractive price points which result in losses, in order to drive the future sales of pods. As we introduce new innovative beverage systems such as Keurig® Kold™ beverage system, we expect to experience higher appliance manufacturing costs as we scale the related manufacturing processes, followed by lower appliance manufacturing cost structures as the supply chain creates more efficient manufacturing processes.

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Business Segments

        Segment information is prepared on the same basis that our CEO, who is our chief operating decision maker, manages the business, evaluates financial results, and makes key operating decisions. The structure includes a Domestic segment containing all U.S. Operations and immaterial operations related to international expansion, and a Canada segment containing all Canadian operations. See Note 4, Segment Reporting , of the Notes to Consolidated Financial Statements included in this Annual Report.

        Domestic.     The Domestic segment sells brewers and accessories and sources, produces and sells coffee, hot cocoa, teas and other beverages, including our Keurig® Kold™ beverages, under a variety of brands in K-Cup® , Vue®, K-Mug™, K-Carafe™ and Kold™ pods ("pods"), 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 our consumer-facing website. 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 pods sold by a third-party licensed roaster.

        Canada.     The Canada segment sells hot system brewers and accessories, and sources, produces and sells coffee, teas and other beverages in pods and coffee in more traditional packaging, including bags, cans, and fractional packages under a variety of brands to retailers including supermarkets, department stores, mass merchandisers, club stores, office coffee distributors, and, through office coffee services to offices, convenience stores, restaurants, hospitality accounts, and to consumers through its website.

The Products

Pods

        The Company offers pods of varying sizes including single-serve K-Cup® , Vue®, K-Mug™ , and multi-serve K-Carafe™ pods. 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 also procure Robusta bean coffee for use in certain blends. We carefully select our coffee beans and appropriately roast the coffees to optimize their taste and flavor differences. We manufacture and sell pods of our own brands, such as Green Mountain Coffee, The Original Donut Shop and Van Houtte, as well as participating brands through licensing and manufacturing agreements, including brands such as Dunkin' Donuts™, Eight O'Clock®, Folgers®, Kirkland Signature™, Newman's Own® Organics, Peet's and Starbucks®. The Company also has licensing agreements for manufacturing, distributing, and selling tea under brands such as Lipton®, Celestial Seasonings®, Snapple®, Tazo® and Teavana®. In addition to coffee and tea, we also produce and sell pods for lemonade, hot apple cider, cocoa and other dairy-based beverages.

        Expanded or new brand offerings and partnerships in fiscal 2015 for the Keurig® hot brewing system included: the launch of Green Mountain Coffee® Organic, a new line of premium coffees that are certified as both organic and Fair Trade Certified™; a partnership with Community Coffee Company; an agreement to launch illy® brand to K-Cup® pods beginning in Fall 2015; the June 2015 launch of Laughing Man® brand, a new selection of gourmet coffees offered in K-Cup® pods following our 2014 acquisition of the Laughing Man brand; an expanded ten year partnership with Caribou Coffee for the manufacturing, marketing, distribution, and sale of Caribou Coffee in Keurig® pod formats; and a multi-year manufacturing and distribution agreement with Reily Foods Company for New England® brand coffee, New Orleans Famous French Market Since 1890® brand coffee, and Luzianne® brand iced tea pods. In fiscal 2015, in partnership with the Campbell Soup Company, we also launched K-Cup® pods for Campbells® Fresh-Brewed Soup®.

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        In addition, our Keurig® Kold™ beverage system creates a wide variety of cold still and carbonated beverages, using a Kold™ beverage pod. Kold™ beverage brands include partner brands with The Coca-Cola Company and Dr. Pepper Snapple Group, as well as our own brands.

Brewers and Accessories

        We offer a variety of accessories for the Keurig® brewing platforms including pod storage racks, baskets, and brewer carrying cases. We also sell other coffee-related equipment and accessories.

Other Products and Royalties

        We sell coffee in other package types in addition to pods 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), and we also earn royalties from licensees under various licensing agreements described in more detail under the section titled "Business Relationships" below.

Business Relationships

        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 or, depending on the relationship, directly to consumers. Under certain 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.

Our Strengths

        We believe our innovative system approach provides us with a unique competitive advantage in the marketplace, as we design all aspects of the system, including the beverage, the pod, the pod manufacturing lines, the appliance and its components. We believe that the consumer benefits delivered by our Keurig® beverage systems will preserve our leadership position in the marketplace and give us the opportunity to continue to grow our coffee business and expand into other beverage categories, such as cold carbonated and still beverages with our Keurig® Kold™. We also believe we have differentiated our Company and our Keurig® brand with our ability to partner with other beverage brand companies in order to bring consumers significant beverage and brand choice in our Keurig® beverage systems. Finally, we continue to invest to ensure innovation in our current brewing systems and to enable us to develop and market new systems for adjacent categories.

        We believe the primary consumer benefits delivered by our Keurig® beverage systems are as follows:

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

    2
    Convenience—Keurig® beverage systems prepare beverages at the touch of a button with no mess, no fuss.

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    3
    Choice—Keurig offers more than 550 individual hot varieties and 25 Kold 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, as well as sodas, sports hydration mixes and flavored water beverages, in pods.

        We see these benefits as being our competitive advantage and believe it is the combination of these attributes that makes Keurig® beverage systems appealing to consumers.

Corporate Objective and Philosophy

        Our objective is to be a leader in the beverage business by selling high-quality, premium beverages and innovative beverage systems that consistently provide a superior beverage experience.

        Our purpose: "Create the ultimate beverage experience in every life we touch from source to cup—transforming the way the world understands business" guides our approach to business.

        Our mission: "A Keurig® brewer on every counter and a beverage for every occasion" drives our strategy.

        Essential elements of our philosophy and approach include:

        High-Quality Beverages.     We are passionate about providing high quality beverages including roasting great coffees from some of the highest-quality Arabica beans available from the world's coffee-producing regions and using a roasting process designed to optimize each coffee's individual taste and aroma, as well as a wide-variety of cold, still and carbonated beverages. We are also passionate about providing other high-quality beverages such as teas, sourced from premium tea growing regions.

        Innovative Brewing Technology.     Our proprietary brewing technology, embodied in our portfolio of premium quality beverage machines and pods, provides the benefits of convenience, variety and consistently great taste. Keurig® beverage systems include the following elements:

    Premium-quality pods, which contain precisely portioned amounts of gourmet coffees, cocoa, teas, soda, sports hydration mixes, and flavored water beverages and other products/offerings in a sealed, low oxygen environment to help maintain freshness.

    Innovative brewers and beverage systems that precisely control the amount, temperature and/or pressure of water to provide coffee, tea, cocoa, soda, sports hydration mix, flavored water beverages or other beverage of a consistent high quality under our own or licensed brands.

    Convenience of one-touch brewing which allows consumers to enjoy the perfect cup simply and quickly, as well as the ability to increasingly customize beverages with accessible software-enabled user interfaces.

        Keurig's hot beverage system has been designed and optimized for producing consistent, high-quality coffee. In addition, we have expanded our hot system beverage selection to include other beverages such as hot apple cider, hot cocoa, brew-over-ice teas, coffees and fruit brews. In the first quarter of fiscal 2016 we introduced our Keurig® Kold™ beverage system which offers a wide-variety of cold, still and carbonated beverages. We believe these beverages can help to increase brewer usage occasions and enhance consumer satisfaction. New beverage development work has also generated proprietary know how and/or patent applications. The Company holds U.S. and international patents covering a range of its pod and brewing technology innovations, with additional patent applications in process. We believe our constant innovation and focus on quality, all directed to delivering a consistently superior beverage, are what differentiates us among competitors in the beverage and beverage system industry.

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        Product Distribution.     The Company seeks to create consumers for life. We believe that coffee and other beverages are convenience purchases, and we utilize our multi-channel distribution network of distributor, retail and consumer direct options to make our products widely and easily available to consumers.

        Sustainable Business Practices.     We view environmental and social sustainability as integral to our business success. We have a long history of sustainable business practices and community support throughout our value chain. We focus our efforts in three key practice areas: Resilient Supply Chain, Sustainable Products, and Thriving People and Communities. Water Stewardship is a common thread throughout these practice areas, and we believe that we can uniquely contribute to local and global water challenges by combining our strengths in sustainability, innovation, and partnership. We expect these same strengths will enable us to meet our 2020 goal of recyclability for all Keurig K-cup® pods, with incremental progress each year prior to 2020. To learn more about our programs visit www.keuriggreenmountain.com/Sustainability .

        Corporate Culture.     At Keurig, we believe in doing business with a purpose. Since our beginning in 1981, we have operated to benefit our consumers, our customers, our employees, and our communities by deeply embedding our values, ethics and integrity into all that we do. The way we think, act, lead, partner, and execute is guided by our values. Our Code of Conduct is posted on our corporate website and explains how we integrate our purpose, mission, and values into our daily decisions. It demonstrates our Company's commitment to our stakeholders to be a responsible corporate citizen and a good business partner.

Customers

        For our AH business sold through retailers, department stores and mass merchants in the Domestic segment, we rely primarily on one fulfillment entity, M.Block & Sons, Inc. ("MBlock"), to process the majority of orders. Our sales processed through MBlock represented 34%, 36% and 37% of the Company's consolidated net sales for fiscal years 2015, 2014 and 2013, respectively. To a lesser extent, we also use other third-parties in the U.S. and Canada for fulfillment services in the AH channel. Further, we are reliant on certain customers for a substantial portion of our revenues, whether the related orders are processed through fulfillment entities or by us. Wal-Mart Stores, Inc. and its affiliates represented approximately 17%, 17% and 14% of our consolidated net sales for fiscal 2015, 2014 and 2013, respectively; and Costco Wholesale Corporation and affiliates represented approximately 12% , 12% and 11% of our consolidated net sales for fiscal 2015, 2014, and 2013 respectively.

Net Sales

        For fiscal 2015, approximately 95% of our consolidated net sales were attributed to the combination of hot system brewer pods and Keurig® hot system brewers and related accessories. Fiscal 2015 net sales of $4,520.0 million were comprised of $3,645.1 million pod net sales, $632.6 million Keurig® beverage system and accessories net sales and $242.3 million of other product net sales such as whole bean and ground coffee selections in bags, fractional packages, and cans, as well as cups, lids and ancillary items to our retail customers primarily in the U.S. and Canada.

Supply Chain

        We operate production and distribution facilities in North America in Castroville, California; Knoxville, Tennessee; Essex, Waterbury and Williston, Vermont; Windsor, Virginia; Sumner, Washington; and Montreal, Quebec. Our production facilities include specially designed proprietary high-speed packaging lines that manufacture pods using freshly-roasted and ground coffee as well as tea, cocoa and other products.

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        In addition, in fiscal 2015 we completed construction on our first Keurig® Kold™ pod production lines within one of our existing facilities in Vermont, and completed construction on a 585,000 square foot facility in Lithia Springs, Georgia that will be dedicated to Keurig® Kold™ pod production as demand requires.

        We utilize third-party contract manufacturers located primarily in China and Malaysia for hot and cold beverage appliance manufacturing. In order to ensure the quality and consistency of our products manufactured by third-party manufacturers in Asia, we have an Asia-based research and development and quality control function that provide manufacturing oversight, project management, and quality support.

Green Coffee Cost and Supply

        We purchased approximately 247 million pounds of coffee in fiscal 2015. We utilize a combination of outside brokers and direct relationships with farms, estates, cooperatives and cooperative groups for our supply of green coffee. Outside brokers provide the largest supply of our green coffee.

        In fiscal 2015, approximately 18% of our purchases were from Fair Trade certified sources. This provides an assurance that farmer groups are receiving the Fair Trade minimum price and an additional premium for certified organic products. In fiscal 2015, approximately 5% of our purchases were from Rain Forest Alliance Certified™ farms. Rainforest Alliance Certified™ coffee is grown using methods that help promote and preserve biodiversity, conserve scarce natural resources, and help farmers build sustainable lives. In fiscal 2015, approximately 68% of our purchases were from traceable sources, which mean that we can identify the farms, estates or co-ops, and develop a relationship directly with the farmers. We believe that the traceability helps us secure long-term supplies of high-quality coffee.

        The supply and price of coffee are subject to high volatility. Supply and price of all coffee grades are affected by multiple factors, such as weather, pest damage, politics, competitive pressures, the relative value of the United States currency and economics in the producing countries.

Marketing and Distribution

        To support customer growth in the U.S. and Canada, we utilize separate selling organizations and different selling strategies for each of our multiple channels of distribution. Both of our segments operate in the AH, AFH and consumer direct channels.

        In the AH channel, we target coffee drinkers who wish to enjoy the speed, convenience and quality of Keurig® brewed beverages. We promote our AH brewing system which includes pods manufactured by the Domestic and Canada segments primarily through mass merchants, specialty and department store retailers, select wholesale clubs and on our website. We also use regionally targeted and national television advertising to promote our AH brewing systems. We rely on MBlock to process a significant amount of our sales orders for our AH business with retailers in the United States. In addition, we rely on a single order fulfillment entity to process the majority of sales orders for our AH business with retailers in Canada. In the AH channel within both the Domestic and Canada segments, our personnel work closely with key retail channel entities on product plans, marketing programs and other product sales support. Initiatives could include online promotional campaigns, circular advertising, in-store demos, mobile marketing, merchandising features and display, and local and national advertising. The Domestic and Canada segments market and sell pods for use in Keurig® beverage systems, as well as other package formats, such as bagged coffee, to supermarkets, grocery stores and certain wholesale clubs for use in AH applications.

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        In the AFH channel, our Domestic segment primarily targets the office coffee channel with a broad offering of brewing platforms that we believe significantly upgrade the quality of the coffee served in the workplace, as well as the food service and hospitality industries. The Domestic segment promotes its AFH brewing system through a selective, but non-exclusive, network of AFH distributors in the U.S. ranging in size from local to national. Keurig® hot system brewers and pods are also available at retail in office superstore locations and directly to small offices through our e-commerce platform. To a lesser degree, the Canada segment markets and sells its coffee and beverage products to the office coffee channel through their AFH distributors. The Canada segment operates a coffee service and distribution network primarily in Canada. The office coffee services business provides office coffee products including a variety of coffee brands and blends, hot system brewing and beverage equipment and beverage supplies directly to offices. Beyond the office coffee channel, we are active in marketing and selling our products to other AFH channels such as food service, convenience, hospitality and business-oriented e-commerce.

        We also operate websites and within social media channels that present our brands to consumers, and serve as e-commerce platforms. This channel provides the opportunity for us to further develop relationships with our consumers.

Competition

        Currently we compete primarily in the coffee and coffeemaker marketplaces.

        The coffee marketplace is highly competitive and fragmented. Our coffee, tea and other beverages compete directly against coffees and teas sold through supermarkets, club stores, mass merchants, specialty retailers and food service accounts, and indirectly against all other coffees. Our competitors in the coffee marketplace include large national and international companies, some of which have greater resources, including marketing and operating resources, and numerous local and regional companies. We compete for limited retailer shelf space for our products, and some of those retailers also market competitive products under their own private labels, some of which are manufactured by us. We also compete with the conventional products of larger companies. Products are distinguished based on quality, price, brand recognition and loyalty, innovation, promotions, nutritional value, and further by our ability to identify and satisfy consumer preferences.

        Similar to the coffee marketplace, the coffeemaker marketplace is also highly competitive, and we compete against larger companies that possess greater marketing and operating resources than our Company. The primary methods of competition are essentially the same as in the coffee marketplace: price, quality, product performance and brand differentiation. In coffeemakers, we compete against all sellers of coffeemakers including companies that produce traditional pot-brewed coffeemakers and other single serve manufacturers, which include, but are not limited to the following:

    Bunn-O-Matic Corporation

    Mars, Inc. (through its FLAVIA® unit)

    Conair, Inc.

    Hamilton Beach / Proctor-Silex, Inc.

    Jarden Corporation

    Nestle S.A. (including its Dolce-Gusto® and Nespresso® brewing systems)

    D.E. Master Blenders 1753 N.V., controlled by JAB Holding Co. (including its TASSIMO® and SENSEO® brewing systems)

    Remington Designs, LLC (including its iCoffee® brewing system)

    Euro-Pro Operating LLC (including its Ninja Coffee Bar™)

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    Stanley Black & Decker, Inc.

    Starbucks Corporation (including its Verismo® brewing system)

    Whirlpool Corporation

        We expect competition in coffee and coffeemakers to remain intense, both within our existing customer base and as we expand into new regions. In both coffee and coffeemakers, we compete primarily by providing a wide variety of high-quality coffee including flavored, Fair Trade Certified™ and organic coffees as well as other beverages, coffeemakers, easy access to our products, superior customer service and a comprehensive approach to customer relationship management. We believe that our ability to provide a convenient and broad network of outlets from which to purchase our products is an important factor in our ability to compete. Through our multi-channel distribution network of wholesale, retail and consumer direct operations we believe we differentiate ourselves from many of our larger competitors, who specialize in only one primary channel of distribution. We also compete to manufacture pods for branded coffee companies and retail stores that offer private label coffee for sale to consumers. We believe our constant innovation and focus on quality, all directed to delivering a consistently superior cup of coffee, differentiate us among competitors in the coffee and coffeemaker industries. We also seek to differentiate ourselves through our socially and environmentally responsible business practices. While we believe we currently compete favorably with respect to all of these factors, there can be no assurance that we will be able to compete successfully in the future.

        We compete not only with other widely advertised branded products, but also with private label or generic products that are generally sold at lower prices.

Research and Development

        Our research and development team includes scientists and engineers who are focused on developing beverage and appliance technology platforms that have broad appeal to consumers and consistently deliver on the key attributes of quality, convenience and choice. Research and development costs are expensed as incurred and amounted to $84.7 million, $76.5 million and $57.7 million for fiscal years 2015, 2014 and 2013, respectively. These costs primarily consist of salary and consulting expenses and are recorded in selling and operating expenses in each respective segment.

Intellectual Property

        The Company owns a number of United States trademarks and service marks that have been registered with the United States Patent and Trademark Office. We anticipate maintaining our trademark and service mark registrations with the United States Patent and Trademark Office. We also own other trademarks and service marks for which we have applications for U.S. registration. The Company has further registered or applied for registration of certain of its trademarks and service marks in the United Kingdom, the European Union, Canada, Japan, the People's Republic of China, South Korea, Taiwan and other foreign countries. The Company has licenses to use other marks, all subject to the terms of the agreements under which such licenses are granted. We believe, as we continue to build brands, most notably today in the U.S. and Canada, our trademarks are valuable assets. Although the laws vary by jurisdiction, trademarks generally are valid as long as they are in use and/or their registrations are properly maintained and have not been found to have become generic. Trademark registrations generally can be renewed indefinitely as long as the trademarks are in use. We believe that our core brands are covered by trademark registrations in the countries where we do business and/or may do business in the near future. We have an active program designed to ensure that our marks and other intellectual property rights are registered, renewed, protected and maintained. In addition, the Company owns numerous copyrights, registered and unregistered, and proprietary trade secrets, technology, know-how processes and other proprietary rights that are not registered.

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        The Company holds U.S. patents and international patents related to our Keurig® hot brewing and pod technology. Of these, a majority is utility patents and the remainder is design patents. We view these patents as very valuable but do not view any single patent as critical to the Company's success. We own patents that cover significant aspects of our products. We have pending patent applications associated with certain elements of current hot K-Cup® pod technology which, if ultimately issued as patents, would extend coverage over all or some portion of hot K-Cup® pods, and have expiration dates extending to 2023. We have patents associated with certain elements of our K-Cup® pod technology issued in various countries outside the United States. Certain elements of the current generation of Vue® and K-Carafe™ pods are covered by patents which expire in 2021 and by others that are still pending. In addition, the Company has various issued and pending patents that relate to the Keurig® 2.0 beverage system, as well as to the Keurig® Kold pod and beverage system. Our pending patent applications may not issue, or if they issue, they may not be enforceable, may be challenged, invalidated or circumvented by others. Further, we continue to invest in further innovation in beverage pods and appliance technology that will enhance our patent position and that may lead to new patents, and take steps we believe are appropriate to protect all such innovation.

        We have diligently protected our intellectual property through the use of domestic and international patents and trademark registrations and through enforcement efforts in litigation. We regularly monitor commercial activity in the countries where we do business and/or may do business and evaluate potential infringement.

Seasonality

        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 typically higher during the last fiscal quarter than other quarters during the fiscal year, as we prepare for the holiday season. Unlike prior comparable periods, inventory during the last quarter of fiscal 2015 was not higher than other quarters of the fiscal year. This was due to lower than anticipated brewer sales than anticipated in the preceding quarters, which caused us to decrease our level of inventory based on revised volume expectations and the higher inventory levels remaining at retail customers. Due to the typical 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.

Working Capital

        Funding for working capital items, including inventory and receivables, is usually sourced through cash flows from operations, and historically included borrowings from our existing credit facilities. For a description of our liquidity and capital resources, see the "Liquidity and Capital Resources" section of "Management's Discussion and Analysis of Financial Condition and Results of Operations," and Note 11, Long-Term Debt , of the Notes to Consolidated Financial Statements.

Employees

        As of September 26, 2015, the Company had approximately 6,000 full-time, part-time, and seasonal employees. We believe our current relations with our employees are good. The number of employees covered by collective bargaining agreements is not significant. We supplement our workforce with temporary workers from time to time, especially in the first quarter of each fiscal year to service increased customer and consumer demand during the peak November-December holiday season and January-March post-holiday season.

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Executive Officers of the Registrant

        Certain biographical information regarding each executive officer of our Company as of November 13, 2015 is set forth below:

Name
  Age   Position   Officer since  

Michael J. Degnan

    51   Chief Legal Officer, Corporate General Counsel and Corporate Secretary     2013  

Stephen L. Gibbs

    43   Vice President and Chief Accounting Officer     2011  

Stéphane Glorieux

    48   President, Keurig Canada     2014  

Brian P. Kelley

    54   President, Chief Executive Officer and Director     2012  

Peter G. Leemputte

    58   Chief Financial Officer and Treasurer     2015  

Linda Longo-Kazanova

    62   Chief Human Resources Officer     2011  

Robert P. Ostryniec

    54   Chief Product Supply Officer     2013  

         Michael J. Degnan was named Chief Legal Officer, Corporate General Counsel of Keurig in March 2013 and appointed Corporate Secretary in June 2014. From January 2011 until March 2013, Mr. Degnan served as Keurig's Vice President, Associate General Counsel—Operations. Mr. Degnan also served as Vice President—General Counsel and Secretary of Keurig, Incorporated from April 2005 until December 2010.

         Stephen L. Gibbs has served as Vice President and Chief Accounting Officer of Keurig since August 2011. Prior to joining the Company, Mr. Gibbs served as Vice President and Chief Accounting Officer for Scientific Games Corporation from April 2006 to August 2011 and Vice President of Finance for Scientific Games Racing from April 2005 to March 2006.

         Stéphane Glorieux was named President, Keurig Canada in May 2014. Mr. Glorieux previously served as Vice President, Cold Platform & International Supply Chain for the Company from 2014 until his promotion in May 2014. From 2012 until 2014, Mr. Glorieux served as Vice President, Supply Chain and Manufacturing for Keurig Canada. Prior to joining the Company, Mr. Glorieux was the Director, Customer Service and Logistics Director, Procurement, for Kraft Food France from 2008 until 2011. From 1991 until 2008, Mr. Glorieux held various management positions with Kraft Food Canada.

         Brian P. Kelley joined Keurig as President, Chief Executive Officer and Director in December 2012. From 2011 until November 2012, Mr. Kelley served as Chief Product Supply Officer, Coca-Cola Refreshments. From 2010 to 2011 Mr. Kelley served as President of Coca-Cola's North America Business Integration, and from 2007 until 2010 Coca-Cola's President and General Manager, Still Beverages and Supply Chain North America. Mr. Kelley originally joined Coca-Cola in 2007.

         Peter G. Leemputte joined Keurig in June 2015 as an Executive Advisor and became the Company's Chief Financial Officer and Treasurer on August 17, 2015. From 2012 until March 2015 Mr. Leemputte served as the Executive Vice President & Chief Financial Officer of Mead Johnson Nutrition Company ("Mead") and, from 2008 to 2012, served as its Senior Vice President and Chief Financial Officer. Prior to working at Mead, Mr. Leemputte served as the Senior Vice President and Chief Financial Officer of Brunswick Corporation from 2003 until 2008, having previously served as Brunswick Corporation's Vice President and Controller from 2001 until 2003.

         Linda Longo-Kazanova has served as Chief Human Resources Officer of Keurig since March 2011. Prior to joining Keurig, Ms. Kazanova was Vice President, Human Resources and Medical for the Burlington Northern Santa Fe Corporation (later acquired by Berkshire Hathaway Inc.) from May 2007 until September 2010.

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         Robert P. Ostryniec joined Keurig as Chief Product Supply Officer in August 2013. From February 2010 until August 2013, Mr. Ostryniec served as Senior Vice President, Global Chief Supply Chain Officer and Quality & Chief Risk Officer of H.J. Heinz Company. At H.J. Heinz Company he also served as Chief Supply Chain officer of North America from May 2005 to January 2010 and Group Vice President Consumer Products-Product Supply from July 2003 to April 2005.

        There is no family relationship among any of the Directors or executive officers of the Company.

Corporate Information

        Keurig Green Mountain, Inc. is a Delaware corporation formed in July 1993. Our corporate offices are located at 33 Coffee Lane, Waterbury, Vermont 05676. The main telephone number is (802) 244-5621, and our e-mail address for investor information is investor.services@gmcr.com . The address of our Company's website is www.KeurigGreenMountain.com .

Available information

        Our Company files annual, quarterly, and current reports, proxy statements, and other documents with the Securities and Exchange Commission ("SEC") under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The public may read and copy any materials that the Company files with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Also, the SEC maintains an Internet website that contains reports, proxy and information statements, and other information regarding issuers, including Keurig, that file electronically with the SEC. The public can obtain any documents that we file with the SEC at www.sec.gov .

        Our Company maintains a website at www.KeurigGreenMountain.com . Our filings with the SEC, including without limitation, our Annual Reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, are available for free through a link maintained on our website under the heading "Investor Relations—Financial Information." Our website also includes our Corporate Governance Principles, Code of Conduct and charters of the Audit and Finance, Compensation and Organizational Development, Governance and Nominating, and Sustainability committees of our Board of Directors. Information contained on our website is not incorporated by reference into this report.

Item 1A.    Risk Factors

        In addition to the other information set forth in this report, you should carefully consider the following factors, which could materially affect our business, financial condition, results of operations or price of our common stock in future periods. The risks described below are not the only risks facing our Company. Additional risks not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, results of operations or the price of our common stock in future periods.

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Our financial performance is highly dependent upon the sales of Keurig® beverage systems and pods.

        A significant percentage of our total revenue is attributable to sales of pods for use with our Keurig® hot system brewers. For the year ended September 26, 2015, total consolidated net sales of pods and Keurig® hot system brewers and related accessories represented approximately 95% of consolidated net sales. Continued acceptance of Keurig® beverage systems, including adoption by consumers of our newly launched Keurig® Kold™ beverage system and sales of pods to an increasing installed base, are significant factors in our growth plans. Any substantial or sustained decline in the sale of Keurig® hot system brewers, failure of consumers to adopt our Keurig® Kold™ beverage system, failure to reduce the cost of our brewers or drinkmakers, or substantial or sustained decline in the sales of our pods would materially adversely affect our business. Keurig® hot system brewers compete against all sellers and types of coffeemakers. If we do not succeed in effectively reducing the costs of manufacturing our beverage systems or differentiating ourselves from our competitors, based on technology, quality of products, desired brands or otherwise, or our competitors adopt our strategies, then our competitive position may be weakened and our sales of Keurig® beverage systems and pods, and accordingly, our profitability may be materially adversely affected.

Our development and launch of the Keurig ® Kold beverage system has required and will continue to require a significant investment and commitment of resources, is subject to numerous risks and uncertainties, and ultimately may not prove successful.

        We have invested and expect to continue to invest significantly in the development and recent launch of our Keurig® Kold™ beverage system and our cold beverage platform technology. Such endeavor involves significant risks and uncertainties, including distraction of management from our existing hot platform operations, insufficient revenues to offset liabilities and expenses associated with developing, launching and growing the new cold platform, inadequate return of capital on our investments, not accurately predicting consumer tastes and the market opportunity for a beverage platform, inability to respond in a timely manner to consumer desires and demands, and unidentified issues not discovered in our due diligence and planning. The Keurig® Kold™ beverage system also has comparatively high price points. We cannot be certain that this platform will be widely accepted by consumers or that they will be willing to pay a higher price for these products. In addition, we may not be able to sufficiently scale the Keurig® Kold™ beverage system or find other ways to reduce the costs of manufacturing the appliance or pods; if we reduce the price of the Keurig® Kold™ appliance without reducing its cost, it will have an adverse effect on our financial condition and operating results. Because the introduction of and investment in a new platform is inherently risky, no assurance can be given that the Keurig® Kold™ beverage system will ultimately be successful or that it will not materially adversely affect our reputation, financial condition, and operating results.

Continued innovation and the successful development and timely launch of new platforms, products and product extensions are critical to our financial results and achievement of our growth strategy.

        Achievement of our growth strategy is dependent, among other things, on our ability to extend the product offerings of our existing brands and introduce innovative new products, including new platforms such as our cold technology. Although we devote significant focus to the development of new products, we may not be successful in developing innovative new products or our new products may not be commercially successful. Additionally, our new product introductions are often time sensitive, and thus failure to deliver innovations on schedule could be detrimental to our ability to successfully launch such new products and retain partners, in addition to potentially harming our reputation and customer loyalty. Our financial results and our ability to maintain or improve our competitive position will depend on our ability to effectively gauge the direction of our key marketplaces and successfully identify, develop, manufacture, market and sell new or improved products in these changing marketplaces.

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Our future financial results are difficult to predict, and failure to meet market expectations for our financial performance or our publicly announced guidance may cause the price of our stock to decline.

        As we and our industry evolve, we expect to face new challenges with respect to our transformation from a coffee company to a multi-category beverage company, our introduction of innovative products and the changing competitive landscape within the single serve category and the beverage industry. These challenges can occur at various stages, including design, supply chain and sales cycle. Our public forecasts regarding the expected performance of our business and future operating results are forward-looking statements subject to risks and uncertainties, including the risks and uncertainties described in our filings with the SEC and in our other public statements, and necessarily reflect current assumptions and judgments that may prove incorrect. As a result, there can be no assurance that our performance will be consistent with any public forecasts or that any variation from such forecasts will not be material and adverse. Failure to meet expectations, particularly with respect to operating margins, earnings per share, operating cash flows, and net revenues, may likely result in a decline and/or increased volatility in the price of our stock. In addition, price and volume fluctuations in the stock market as a whole may affect the price of our stock in ways that may be unrelated to our financial performance.

Our stock price is subject to volatility.

        Our stock price has historically and continues to experience substantial price volatility. We believe our stock price is subject to significant volatility because of factors such as: quarterly variations in our operating results; announcement of new products or technological innovations by us or our competitors, and; changes in earnings estimates. We also believe our stock price reflects, in part, expectations that our cash dividend will continue at current levels or grow, but future dividends remain subject to declaration by the Board of Directors. If we fail to meet these expectations, our stock price may decline, which could have a material adverse impact on investor confidence and employee retention.

        Our share repurchase program could also affect the price of our stock and increase volatility. The timing and actual number of shares repurchased will depend on a variety of factors, including market and business conditions, the timing of open trading windows, trading price, and the nature of other investment opportunities. Although the share repurchase program is intended to enhance long-term stockholder value, we cannot provide assurance that this will occur as price volatility over a given period may result in the average price at which we repurchase our own stock to exceed our stock's price at a given point in time. Any failure to repurchase shares after we have announced our intention to do so may negatively impact our reputation and investor confidence in us and may negatively impact our stock price.

Due to the seasonality of many of our products and other factors such as adverse weather conditions, our operating results are subject to fluctuations.

        Historically, we have experienced increased sales of our Keurig® hot system brewers in our first fiscal quarter due to the holiday season. If sales of our Keurig® hot system brewers during the holiday season do not meet expectations, sales of our pods throughout the remainder of the fiscal year will be negatively impacted. Because of the seasonality of our business, results for any quarter are not necessarily indicative of the results that maybe achieved for the full fiscal year. The impact on sales volume and operating results due to the timing and extent of these factors can significantly impact our business. For these reasons, quarterly operating results should not be relied upon as indications of our future performance.

        The sales of our products are influenced to some extent by weather conditions in the geographies in which we operate. Unusually warm weather during the winter months may have a temporary decrease on the demand for some of our products and contribute to lower sales, which could have an adverse effect on our results of operations for such periods.

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Increased competition, including as a result of industry consolidation, could hurt our businesses.

        The beverage and appliance industries are intensely competitive and we compete with respect to product, quality, convenience and price. We face significant competition in each of our channels and marketplaces. We compete with major international beverage and appliance companies that operate in multiple geographic areas, as well as numerous companies that are primarily local in operation. Our beverages also compete against local or regional brands as well as against private label brands developed by retailers. Our ability to gain or maintain share of sales in the global marketplace or in various local marketplaces or maintain or enhance our relationships with our partners and customers may be limited as a result of actions by competitors, including as a result of increased consolidation in the food and beverage industry and an increase in the number of competitive pod contract manufacturers.

Changes in the beverage environment and retail landscape could impact our financial results.

        The beverage environment is rapidly evolving as a result of, among other things, changes in consumer preferences; shifting consumer tastes and needs; changes in consumer lifestyles; and competitive product and pricing pressures. In addition, the beverage retail landscape is dynamic and constantly evolving, not only in emerging and developing marketplaces, where modern trade is growing at a faster pace than traditional trade outlets, but also in developed marketplaces, where discounters and value stores, as well as the volume of transactions through e-commerce, are growing at a rapid pace. If we are unable to successfully adapt to the rapidly changing environment and retail landscape, our share of sales, volume growth and overall financial results could be negatively affected.

Consolidation in the retail channel, the loss of key retail or grocery customers and efforts by our customers to improve their profitability could adversely affect our financial performance.

        Our industry is being affected by the trend toward consolidation in the retail channel. Retailers have and will likely continue to seek lower prices from us and demand increased marketing or promotional expenditures. Large retailers also may be more likely to use their distribution networks to introduce and develop private label brands. Strategic partners may also choose to vertically integrate their brands' manufacturing and distribution. Any of the foregoing could negatively affect the Company's profitability. In addition, our success depends in part on our ability to maintain good relationships with key retail and grocery customers. The loss of one or more of our key customers could have an adverse effect on our financial performance. In addition, because of the competitive environment facing retailers, many of our customers have increasingly sought to improve their profitability through increased promotional programs, pricing concessions, more favorable trade terms and increased emphasis on private label products. To the extent we provide concessions or trade terms that are favorable to customers, our margins would be reduced. Further, if we are unable to continue to offer terms that are acceptable to our significant customers or our customers determine that they need fewer inventories to service consumers; these customers could reduce purchases of our products or may increase purchases of products from our competitors, which would harm our sales and profitability.

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Failure to maintain strategic relationships with well-recognized brands/brand owners and private label brands could adversely impact our future growth and business.

        We have entered into strategic relationships for the manufacturing, distribution, and sale of pods with well-regarded beverage companies such as Dunkin' Brands, The J.M. Smucker Company, Newman's Own® Organics, Kraft Foods Group, Peet's Coffee & Tea, Starbucks®, Dr Pepper Snapple Group, Inc. and The Coca-Cola Company®, as well as with retailers such as Costco and Wal-Mart for their private label brands. As independent companies, our strategic partners make their own business decisions which may not align with our interests. In addition, many of our strategic partners have the right to manufacture or distribute their own specialty beverage products. If we are unable to provide an appropriate mix of incentives to our strategic partners through a combination of pricing and marketing and advertising support, or if our strategic partners are not satisfied with our brand innovation and technological or other development efforts, they may take actions, including entering into agreements with competing pod contract manufacturers or vertically integrating to manufacture their own pods. Increasing competition among pod manufacturers and the move to vertical integration may result in price compression, which could have an adverse effect on our gross margins. The loss of strategic partners could also adversely impact our future profitability and growth, awareness of our Keurig® brewers, our ability to attract additional branded or private label parties to do business with us or our ability to attract new consumers to buy Keurig® brewers.

Product safety and quality concerns could negatively affect our business.

        Our success depends in part on our ability to maintain consumer confidence in the safety and quality of all of our products. While we are committed to the safety and quality of our products, we may not achieve our product safety and quality standards. Product safety or quality issues, or mislabeling, actual or perceived, or allegations of product contamination or quality or safety issues, even when false or unfounded, could subject us to product liability and consumer claims, negative publicity, a loss of consumer confidence and trust, may require us from time to time to conduct costly recalls from some or all of the channels in which the affected product was distributed, could damage the goodwill associated with our brands, and may cause consumers to choose other products. The terms of our warranty coverage varies with our suppliers and vendors. Such issues could result in the destruction of product inventory, lost sales due to the unavailability of product for a period of time, and higher than anticipated rates of warranty returns and other returns of goods, all of which could cause our business to suffer and affect our results of operations.

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Increases in the cost of high-quality Arabica coffee beans or other commodities or decreases in the availability of high quality Arabica coffee beans or other commodities could have an adverse impact on our business and financial results.

        We purchase, roast, and sell high-quality whole bean Arabica coffee and related coffee products. The price of coffee is subject to significant volatility, and may increase due to the factors described below. The Arabica coffee of the quality we seek tends to trade on a negotiated basis at a premium above the "C" price of coffee. This premium depends upon the supply and demand at the time of purchase and the amount of the premium can vary significantly. Increases in the "C" coffee commodity price do increase the price of high-quality Arabica coffee and also impact our ability to enter into fixed-price purchase commitments. We frequently enter into supply contracts whereby the quality, quantity, delivery period, and other negotiated terms are agreed upon, but the date, and therefore price, at which the base "C" coffee commodity price component will be fixed has not yet been established. These are known as price-to-be-fixed contracts. The supply and price of coffee we purchase can also be affected by multiple factors in the producing countries, including weather, natural disasters, crop disease (such as coffee rust), general increase in farm inputs and costs of production, inventory levels and political and economic conditions, as well as the actions of certain organizations and associations that have historically attempted to influence prices of green coffee through agreements establishing export quotas or by restricting coffee supplies. Speculative trading in coffee commodities can also influence coffee prices. Because of the significance of coffee beans to our operations, combined with our ability to only partially mitigate future price risk through purchasing practices and hedging activities, increases in the cost of high-quality Arabica coffee beans could have an adverse impact on our profitability. In addition, if we are not able to purchase sufficient quantities of green coffee due to any of the above factors or a worldwide or regional shortage, we may not be able to fulfill the demand for our coffee, which could have an adverse impact on our business and financial results.

Price increases may not be sufficient to offset cost increases and maintain profitability or may result in sales volume declines.

        We may be able to pass some or all raw materials, energy and other input cost increases to customers by increasing the selling prices of our products or decreasing the size of our products; however, higher product prices or decreased product sizes may also result in a reduction in sales volume and/or consumption. If we are not able to increase our selling prices or reduce product sizes sufficiently to offset increased raw material, energy or other input costs, including packaging, direct labor, overhead and employee benefits, or if our sales volume decreases significantly, there could be a negative impact on our results of operations and financial condition.

Our long-term purchase commitments for certain strategic raw materials critical for the manufacture of pods and appliances could impair our ability to be flexible in our business without penalty.

        In order to ensure a continuous supply of high quality raw materials some of our inventory purchase obligations include long-term purchase commitments for certain strategic raw materials critical for the manufacture of pods and appliances. The timing of these may not always coincide with the period in which we need the supplies to fulfill customer demand. This could lead to higher and more variable inventory levels and/or higher raw material costs.

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Investment in new business strategies, acquisitions and joint ventures could disrupt the Company's ongoing business and present risks not originally contemplated.

        The Company has invested, and in the future may invest, in new business strategies, acquisitions and/or joint ventures. New ventures are inherently risky and may not be successful. In evaluating such endeavors, we are required to make difficult judgments regarding the value of business strategies, opportunities, technologies and other assets, and the risks and cost of potential liabilities. Furthermore, acquisitions and investments involve certain other risks and uncertainties, including the risks involved with entering new competitive categories or regions, the difficulty in integrating newly-acquired businesses, the challenges in achieving strategic objectives and other benefits expected from acquisitions, investments or joint ventures, the diversion of our attention and resources from our operations and other initiatives, the potential impairment of acquired assets and liabilities, the performance of underlying products, capabilities or technologies and the potential loss of key employees and customers of the acquired businesses.

Damage to our reputation or brand name or loss of brand relevance could negatively impact us.

        We believe our success depends on our ability to maintain the brand image of our existing products, build up brand image for new products and brand extensions, and maintain our corporate reputation. Product safety or quality issues, actual or perceived, or allegations of product contamination or safety issues, even when false or unfounded, could tarnish our image and that of affected brands. If we are unable to meet our sustainability targets, including the successful development and introduction of a recyclable K-Cup® pod prior to our 2020 100% implementation goal, consumers may lose trust and confidence in our brand and our Company's commitment to sustainability, and our brand could be damaged. Our brand name and image could also be negatively affected by claims made against us by third parties alleging violations of law, including antitrust or competition laws. Such issues could negatively affect our profitability and brand image.

The loss of key personnel or difficulties recruiting and retaining our senior management team could adversely impact our business and financial results.

        Much of our future success depends on the continued availability and service of our senior management. The loss of any of our executive officers or other key senior management personnel, or difficulties in recruiting high quality personnel to new positions could harm our business and our ability to timely achieve our strategic initiatives. If we are unable to retain and motivate our senior management team sufficiently to maintain our current business and support our projected growth and initiatives, our business and financial performance may be adversely affected.

Obsolete inventory may result in reduced prices or write-downs.

        We must manage our inventory effectively. As we innovate and introduce new brewers to the marketplace, our existing brewers are at an increased risk of inventory obsolescence. If we ultimately determine that we have excess brewers, we may have to reduce our prices and write-down inventory which could have an adverse effect on our business, financial condition, and results of operations. Risks of inventory obsolescence also exist with our products that are subject to expiration, such as pod components and beverage ingredients. And as we launch new beverage platforms, risk of excess inventory also exists if we are unable to accurately forecast demand for these new products. If we are unable to accurately forecast demand for our products, and inventory expires or becomes unusable prior to its use, our business, financial condition and results of operations could be adversely affected.

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        Conversely, if new brewers' launches are delayed, we may have insufficient existing brewer inventory to meet our customer demand which could result in lost revenue opportunities and have an adverse impact on our financial results.

We rely on a limited number of companies for certain strategic material, product manufacturing and order fulfillment, and currently have a limited number of roasting and manufacturing facilities, so a significant disruption in the operation of any of these companies or in any of these facilities could materially adversely affect us.

        We have a limited number of suppliers for certain strategic raw materials critical for the manufacture of pods and the processing of certain key ingredients in our pods. In addition, a small number of companies manufacture the vast majority of our brewers. We also currently roast and manufacture our coffee and other beverage products in facilities in the United States (in Vermont, Tennessee, Washington, Virginia, and California) and one facility in Canada. Any disruption in operation of these companies or facilities, whether as a result of a natural disaster, contractual dispute or other causes, could significantly impair our ability to meet demand for our products and adversely affect our business, financial condition and results of operations. Moreover, if demand increases more than we currently forecast, we will need to either expand our current capabilities internally or acquire additional capacity and the failure to do so in a timely or cost effective manner could have a negative impact on our business.

        In addition, we rely primarily on one order fulfillment entity, M.Block & Sons, Inc. ("MBlock"), to process the majority of orders sold through to retailers, department stores and mass merchants in the United States. See Note 2, Significant Accounting Policies for the Company's revenue recognition policy on how we recognize revenue on orders processed through fulfillment entities. The inability of MBlock to perform its obligations to us, whether due to deterioration in its financial condition, integrity or failure of its business systems or otherwise, could result in significant losses that could materially adversely affect us. If our relationship with MBlock is terminated, we can provide no assurance that we would be able to contract with another third-party to provide these services to us in a timely manner or on favorable terms or that we would be able to internalize the related services effectively or in a timely manner.

We rely on independent certification for a number of our products. Loss of certification within our supply chain or as related to our manufacturing processes could harm our business.

        We rely on independent certification, such as certifications of our products as "organic" or "Fair Trade," to differentiate some of our products from others, such as the Newman's Own® Organics product line, Green Mountain Coffee® Fair Trade Certified™ coffee line and the Canada segment's Fair Trade Organic Collection. In fiscal 2015, approximately 28% of our coffee purchases were from certified sources. We must comply with the requirements of independent organizations or certification authorities in order to label our products as certified. The loss of any independent certifications could adversely affect our marketplace position, which could harm our business.

Our failure to accurately forecast customer demand for our products, or to quickly adjust to forecast changes, could adversely affect our business and financial results.

        There is inherent risk in forecasting demand due to the uncertainties involved in assessing the current level of maturity of the single-serve component of our business. We set target levels for the manufacture of beverages systems and pods and for the purchase of green coffee in advance of customer orders based upon our forecasts of customer demand and those of our business partners.

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        If our forecasts exceed demand, we could experience excess inventory in the short-term, excess manufacturing capacity in the short and long-term, and/or price decreases, all of which could impact our financial performance. In addition, we may be contractually bound to minimum purchase commitments over a period of time which exceed customer demand. Alternatively, if demand exceeds our forecasts significantly beyond our current manufacturing capacity, we may not be able to satisfy customer demand, which could result in a loss of share if our competitors are able to meet customer demands. A failure to accurately predict the level of demand for our products could adversely affect our net revenues and net income.

Increases or changes in income or indirect tax rates, the adoption of new U.S. or international tax legislation or exposure to additional tax liabilities could have a material adverse impact on our financial results.

        As a multinational corporation, we are subject to income taxes as well as non-income based taxes, in both the United States and various foreign jurisdictions.

        Our tax filings for various periods in the jurisdictions in which we do business may be subjected to audit by the relevant tax authorities. These audits may result in assessments of additional taxes, including interest and penalties, which are subsequently resolved with the authorities or potentially through the courts.

        Increases in income tax rates could reduce our after-tax income from affected jurisdictions. Other changes in tax laws, regulations, related interpretations, and tax accounting standards in the U.S. and various foreign jurisdictions in which we operate may adversely affect our financial results. For example, the United States, many countries in the European Union, and other foreign jurisdictions where we do business, are actively considering changes in relevant tax, accounting and other laws, regulations and interpretations, including changes to tax laws applicable to corporate multinationals, which, if enacted, could have a significant adverse impact on our effective tax rate.

Failure to comply with applicable transfer pricing and similar regulations could harm our business and financial results.

        In many countries, including the United States, we are subject to transfer pricing and other tax regulations designed to ensure that appropriate levels of income are reported as earned and are taxed accordingly.

        Although we believe that we are in substantial compliance with all applicable regulations and restrictions, we are subject to the risk that governmental authorities could audit our transfer pricing and related practices and assert that additional taxes are owed.

        In the event that the audits or assessments are concluded adversely to us, we may or may not be able to offset or mitigate the consolidated effect of foreign income tax assessments through the use of U.S. foreign tax credits. Because the laws and regulations governing U.S. foreign tax credits are complex and subject to periodic legislative amendment, we cannot be sure that we would in fact be able to take advantage of any foreign tax credits in the future.

If we are unable to expand our operations in new countries, our long-term growth rate could be negatively affected.

        Our success depends in part on our ability to grow our business in new countries, which in turn depends on economic and political conditions in those countries, our ability to establish operations in those countries or to form strategic business partnerships including with established brands and to make necessary infrastructure enhancements to production facilities, distribution networks, order processing and fulfillment systems and technology. Moreover, the supply of our products in new countries must match consumers' demand for those products. Due to product price, limited purchasing power and cultural differences, there can be no assurance that our existing products or new products currently under development will be accepted in any particular new country or that we will be able to develop new products that will be successful in any particular new country.

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Exposure to foreign currency, commodity and interest rate risk could adversely affect our results of operations and financial condition.

        Our foreign operations are primarily related to our Canada segment, which in fiscal 2015 represented 12.0% of the Company's net sales. Revenues and expenses from our Canada segment are generally derived from sales and operations conducted in the Canadian dollar. As a result, our revenues are adversely affected when the United States dollar strengthens against the Canadian dollar and are positively affected when the United States dollar weakens. Conversely, our Canadian dollar-denominated expenses decrease when the United States dollar strengthens against the Canadian dollar and increase when the United States dollar weakens. Additionally, our assets and liabilities denominated in Canadian dollars are similarly affected when the United States dollar fluctuates against the Canadian dollar. As we expand geographically, we expect to have increasing foreign currency risk associated with cash flows from foreign subsidiaries, foreign currency purchase commitments, and foreign currency intercompany debt. As a result, foreign currency fluctuations could have an adverse effect on our results of operations and financial condition.

        From time to time we engage in transactions involving various derivative instruments to mitigate our foreign currency exchange rate exposures. More specifically, we hedge, on a net basis, the foreign currency exposure of a portion of our assets and liabilities that are denominated in Canadian dollars. We also have coffee hedging arrangements and interest rate swap agreements.

        While we attempt and will continue to attempt to mitigate some of our foreign currency exchange rate risk with hedging and other activities, our business nevertheless will remain subject to foreign exchange risk from foreign currency translation exposures that we may not be able to manage through effective hedging or the use of other financial instruments and we may incur material losses from such hedging transactions.

We are subject to risks generally associated with companies that operate globally.

        While our foreign operations are primarily related to our Canada segment, we source our green coffee, certain production equipment, and components of our brewers and manufacturing of our brewers from countries outside the United States. As a result, we are subject to risks inherent in multinational operations which include: unique economic conditions; changes in political climate; differing tax structures; other jurisdictions' laws, regulations and restrictions. As our operations further broaden geographically, we expect that our expanded foreign operations will continue to be exposed to these same risks.

If we are not able to build and sustain proper information technology infrastructure or successfully implement our business transformation initiative, our business could suffer.

        We depend on information technology to improve the effectiveness of our operations, to interface with our customers, to maintain financial accuracy and efficiency, to comply with regulatory financial reporting, legal and tax requirements, and for digital marketing activities and online communication among our locations and between our personnel and the personnel of our contract manufacturers, suppliers or other third-party partners. If we do not allocate and effectively manage the resources necessary to build and sustain the proper information technology infrastructure, we could be subject to transaction errors, processing inefficiencies, the loss of customers, business disruptions, the loss of or damage to intellectual property, or the loss of sensitive or confidential data through security breach or otherwise.

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        We have embarked on a multi-year business transformation initiative to streamline business processes and migrate certain of our financial processing systems to an enterprise-wide system solution. There can be no certainty that this initiative will deliver the expected benefits. If we do not allocate and effectively manage the resources necessary to build and sustain enterprise-wide system solution, or if we fail to achieve the expected benefits from this initiative, it may impact our ability to process transactions accurately and efficiently and remain in step with changing business needs, which could result in the loss of customers or consumers. In addition, the failure to either deliver the applications on time, or anticipate the necessary readiness and training needs, could lead to business disruption and loss of customers or consumers and revenue.

If we are unable to protect our information systems against service interruption or failure, misappropriation of data or breaches of security, our operations could be disrupted, we could be subject to costly government enforcement actions and private litigation and our reputation may be damaged.

        Our businesses involve the collection, storage and transmission of personal, financial or other information that is entrusted to us by our customers and employees. Our information systems also contain the Company's proprietary and other confidential information related to our businesses. Our efforts to protect such information may be unsuccessful due to the actions of third parties, computer viruses, physical or electronic break-ins, catastrophic events, employee error or malfeasance or other attempts to harm our systems. Because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems, change frequently and often are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures in time. We could also experience a loss of critical data and delays or interruptions in our ability to manage inventories or process transactions. Some of our commercial partners, such as those that help us deliver our website, may receive or store information provided by us or our users through our websites. If these third parties fail to adopt or adhere to adequate information security practices, or fail to comply with our online policies, or in the event of a breach of their networks, our users' data may be improperly accessed, used or disclosed.

        If our systems are harmed or fail to function properly, we may need to expend significant financial resources to repair or replace systems or to otherwise protect against security breaches or to address problems caused by breaches. If we experience a significant security breach or fail to detect and appropriately respond to a significant security breach, we could be exposed to costly legal or regulatory actions against us in connection with such incidents, which could result in orders or consent decrees forcing us to modify our business practices. Any incidents involving unauthorized access to or improper use of user information, or incidents that are a violation of our online privacy policy could harm our brand reputation and diminish our competitive position. Any of these events could have a material and adverse effect on our business, reputation or financial results. Our insurance policies carry coverage limits, which may not be adequate to reimburse us for losses caused by security breaches.

Our intellectual property may not be valid, enforceable, or commercially valuable.

        While we make efforts to develop and protect our intellectual property, the validity, enforceability and commercial value of our intellectual property rights may be reduced or eliminated by the discovery of prior inventions by third-parties, the discovery of similar marks previously used by third-parties, the successful independent development by third-parties of the same or similar confidential or proprietary innovations or changes in the supply or distribution chains that render our rights invalid or obsolete, or narrow their scope. In addition, while we make efforts to ensure that our commercial products, manufacturing processes, and brands have freedom to operate and do not infringe any third party rights, it is possible that some third party rights are not or are not able to be identified at the time of product commercialization, and could provide a basis for an allegation of infringement.

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        We rely on trademark, trade secret, patent and copyright laws to protect our intellectual property rights. We cannot be sure that these intellectual property rights will be maximized or that they can be successfully asserted. There is a risk that we will not be able to obtain and perfect our own or, where appropriate, license intellectual property rights necessary to support new product introductions. We cannot be sure that these rights, if obtained, will not be invalidated, circumvented or challenged in the future. In addition, even if such rights are obtained in the United States, the laws of some of the other countries in which our products are or may be sold do not protect our intellectual property rights to the same extent as the laws of the United States. Our failure to perfect or successfully assert our intellectual property rights could make us less competitive and could have an adverse effect on our business, operating results and financial condition.

Litigation pending against us could expose us to significant liabilities and damage our reputation.

        We are currently party to various legal and other proceedings, and additional claims may arise in the future. See Note 20, Commitments and Contingencies , of the Notes to Consolidated Financial Statements included within Part II of this Annual Report on Form 10-K. Regardless of the merit of particular claims, litigation may be expensive, time-consuming, operationally disruptive and distracting to management. In addition, our brand name and image could be negatively affected by claims made against us by third parties alleging violations of law, including antitrust or competition laws.

        These matters could have a material adverse impact on our financial position and results of operations. We can provide no assurances as to the outcome of any litigation. An adverse resolution or outcome of any of these legal proceedings or claims could have a negative impact on our financial condition, results of operations or liquidity. In recognition of these considerations, we may from time to time enter into arrangements to settle litigation.

U.S. and international laws and regulations could adversely affect our business.

        Our products are extensively regulated in every jurisdiction in which we operate and, as we continue to expand geographically, will become subject to the laws and regulations of additional jurisdictions. Our products are subject to numerous food safety and other laws and regulations relating to the sourcing, manufacturing, storing, marketing, advertising, and distributing of these products. Other laws and regulations relate to labeling requirements, the environment, relations with distributors and retailers, employment, privacy, health and safety and trade practices. Our expanding international business exposes us to economic factors, regulatory requirements, increasing competition and other risks associated with doing business in foreign countries. Our international business is also subject to U.S. laws, regulations and policies, including anti-corruption and export laws and regulations.

        We maintain policies and controls to comply with such laws and regulations and exercise oversight of such compliance. However, any failure by us or others working on our behalf to comply with these laws could result in criminal, civil or administrative penalties which could negatively affect our results of operations.

        In addition, enforcement of existing laws and regulations, changes in legal requirements, and/or evolving interpretations of existing regulatory requirements, may result in increased compliance costs and create other obligations, financial or otherwise, that could adversely affect our business, financial condition or operating results.

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Significant additional labeling or warning requirements or limitations on the availability of our products may inhibit sales of affected products.

        Various jurisdictions may seek to adopt significant additional product labeling (such as requiring labeling of products that contain genetically modified organisms) or warning requirements or limitations on the availability of our products relating to the content or perceived adverse health consequences of certain of our products. If these types of requirements become applicable to one or more of our major products under current or future environmental or health laws or regulations, they may inhibit sales of such products. One such law, which is in effect in California and is known as Proposition 65, requires that a warning appear on any product sold in California that contains a substance that, in the view of the state, causes cancer or birth defects. The state maintains lists of these substances and periodically adds other substances to these lists. Proposition 65 exposes all food and beverage producers to the possibility of having to provide warnings on their products in California because it does not provide for any generally applicable quantitative threshold below which the presence of a listed substance is exempt from the warning requirement. Consequently, the detection of even a trace amount of a listed substance can subject an affected product to the requirement of a warning label. However, Proposition 65 does not require a warning if the manufacturer of a product can demonstrate that the use of the product in question exposes consumers to a daily quantity of a listed substance that is below a "safe harbor" threshold that may be established, is naturally occurring, is the result of necessary cooking, or is subject to another applicable exception. One or more substances that are currently on the Proposition 65 lists, or that may be added to the lists in the future, can be detected in Company products, including coffee, at low levels that are safe. With respect to substances that have not yet been listed under Proposition 65, the Company takes the position that listing is not scientifically justified. With respect to substances that are already listed, the Company takes the position that the presence of each such substance in Company products is subject to an applicable exemption from the warning requirement. The State of California or other parties, however, may take a contrary position. If we were required to add Proposition 65 warnings on the labels of one or more of our beverage products produced for sale in California, the resulting consumer reaction to the warnings and possible adverse publicity could negatively affect our sales both in California and in other marketplaces.

Adverse changes in global and domestic economic conditions or a worsening of the United States economy could materially adversely affect us.

        For the year ended September 26, 2015, our net sales in the United States were approximately $4.0 billion, or 88% of our total net sales. Our sales and performance depend significantly on consumer confidence and discretionary spending, which remain under pressure from United States and global economic conditions. Unfavorable general economic conditions, such as a worsening of economic conditions and/or decrease in consumer spending in the United States, may adversely impact our sales, reduce our profitability and could negatively affect our overall financial performance.

Climate change may have a long-term adverse impact on our business and results of operations.

        There is increasing concern that a gradual increase in global average temperatures due to increased concentration of carbon dioxide and other greenhouse gases in the atmosphere will cause significant changes in weather patterns around the globe and an increase in the frequency and severity of natural disasters. Decreased agricultural productivity in certain regions of the world as a result of changing weather patterns may limit availability or increase the cost of key agricultural commodities, such as coffee and tea, which are important sources of ingredients for our products, and could impact the food security of communities around the world. Increased frequency or duration of extreme weather conditions could also impair production capabilities, disrupt our supply chain or impact demand for our products. As a result, the effects of climate change could have a long-term adverse impact on our business and results of operations.

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Item 1B.    Unresolved Staff Comments

        None.

Item 2.    Properties

        Our significant facilities are as follows:

Business
Segment
  Purpose   Location   Approximate
Square Feet
  Owned
or Leased
  Expiration
of Lease (fiscal year)
 

Domestic

  Manufacturing Space   California     55,000     Leased     2020  

Domestic

  Manufacturing Space   Vermont     806,200     Leased     2016 - 2026  

Domestic

  Manufacturing Space   Washington     197,800     Leased     2017  

Domestic

  Manufacturing Space   Tennessee     334,480     Owned     —    

Domestic

  Manufacturing Space   Virginia     330,000     Owned     —    

Domestic

  Manufacturing Space   Vermont     122,950     Owned     —    

Domestic

  Manufacturing Space   Georgia     585,000     Owned     —    

Domestic

  Research and Development   Vermont     55,000     Owned     —    

Domestic

  Research and Development   Massachusetts     41,705     Leased     2023  

Domestic

  Research and Development   Massachusetts     151,000     Leased     2029  

Domestic

  Research and Development   Shenzhen, China     7,000     Leased     2018  

Domestic

  Warehouse and Distribution   Washington     224,000     Leased     2016 - 2017  

Domestic

  Warehouse and Distribution   New Jersey     905,000     Leased     2016  

Domestic

  Warehouse and Distribution   California     62,000     Leased     2021  

Domestic

  Warehouse and Distribution   Vermont     72,000     Owned     —    

Domestic

  Administrative Offices   Vermont     69,000     Leased     2016 - 2018  

Domestic

  Administrative Offices   Vermont     72,250     Owned     —    

Domestic

  Administrative Offices   Massachusetts     313,337     Leased     2016 - 2029  

Domestic

  Administrative Offices   Lausanne, Switzerland     9,000     Leased     2020  

Canada

  Administrative Offices   Alberta     24,000     Leased     2016 - 2020  

Canada

  Warehouse and Distribution   Alberta     58,000     Leased     2017 - 2020  

Canada

  Warehouse and Distribution   British Columbia     53,000     Leased     2016 - 2020  

Canada

  Administrative Offices   Ontario     17,000     Leased     2016 - 2019  

Canada

  Warehouse and Distribution   Ontario     55,000     Leased     2016 - 2019  

Canada

  Administrative Offices   Quebec     95,000     Owned     —    

Canada

  Administrative Offices   Quebec     16,521     Leased     2016 - 2022  

Canada

  Manufacturing Space   Quebec     59,000     Leased     2020  

Canada

  Manufacturing Space   Quebec     80,000     Owned     —    

Canada

  Warehouse and Distribution   Quebec     139,000     Owned     —    

Canada

  Warehouse and Distribution   Quebec     102,000     Leased     2016 - 2022  

Corporate

  Administrative Offices   Vermont     152,991     Leased     2016 - 2021  

        In addition to the locations listed above, the Company has inventory at various locations managed by third-party warehouses and order fulfillment entities.

Item 3.    Legal Proceedings

        For information regarding legal proceedings in which we are involved, see Note 20, Commitments and Contingencies , to the Consolidated Financial Statements included in Item 8 of Part II of this Annual Report on form 10-K.

Item 4.    Mine Safety Disclosures

        Not applicable.

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PART II

Item 5.    Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Price Range of Securities

        The Company's common stock trades on the NASDAQ Global Select Market under the symbol GMCR. The following table sets forth the high and low closing prices as reported by NASDAQ and the quarterly cash dividend declared per share of our common stock for the periods indicated:

 
   
  High   Low   Dividend
declared
per share
 
Fiscal 2014   13 weeks ended December 28, 2013   $ 77.25   $ 58.18   $ 0.25  
    13 weeks ended March 29, 2014   $ 123.74   $ 74.63   $ 0.25  
    13 weeks ended June 28, 2014   $ 126.09   $ 90.61   $ 0.25  
    13 weeks ended September 27, 2014   $ 137.48   $ 113.20   $ 0.25  
Fiscal 2015   13 weeks ended December 27, 2014   $ 157.10   $ 128.30   $ 0.2875  
    13 weeks ended March 28, 2015   $ 137.72   $ 113.20   $ 0.2875  
    13 weeks ended June 27, 2015   $ 118.44   $ 77.96   $ 0.2875  
    13 weeks ended September 26, 2015   $ 76.63   $ 49.46   $ 0.2875  

Number of Equity Security Holders

        As of November 13, 2015, the number of record holders of the Company's common stock was 370.

Dividends

        We paid dividends to the holders of our common stock on a quarterly basis in fiscal 2015. Decisions to declare and pay future cash dividends are at the discretion of the Board of Directors and are dependent on several factors, including our operating performance, financial condition, capital expenditure requirements and other measures deemed relevant by the Board of Directors.

Securities Authorized for Issuance Under Equity Compensation Plans

Plan category
  Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights (3)
  Weighted-
average exercise
price of
outstanding
options, warrants
and rights (4)
  Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a)) (5)
 
 
  (a)
  (b)
  (c)
 

Equity compensation plans approved by security holders (1)

    2,598,364   $ 44.99     9,212,702  

Equity compensation plans not approved by security holders (2)

    17,481   $ 35.24     —    

Total

    2,615,845   $ 44.92     9,212,702  

(1)
Includes the 1999 Stock Option Plan, the 2000 Stock Option Plan, the 2006 Incentive Plan, the 2002 Amended and Restated Deferred Compensation Plan, the 2014 Amended and Restated Employee Stock Purchase Plan and the 2014 Omnibus Plan. See Note 16, Employee Compensation Plans, of the Consolidated Financial Statements included in this Annual Report.

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(2)
Includes the 2005 compensation plan assumed in the 2006 acquisition of Keurig, Incorporated and inducement grant to Linda Longo-Kazanova. See Note 16, Employee Compensation Plans, of the Consolidated Financial Statements included in this Annual Report.

(3)
Includes shares that may be issued under the 2014 Omnibus Plan pursuant to outstanding performance stock units granted in fiscal 2015 (and whose performance period had not ended as of September 26, 2015), assuming the target award (100%) is met. The number of shares ultimately issued will be based on achievement of performance criteria associated with the awards. Shares underlying the performance stock units granted in fiscal 2014 are not included in column (a) as the performance period has concluded and the threshold performance criteria was not achieved.

(4)
Weighted-average exercise price of outstanding options only. Phantom stock units, restricted stock units and performance stock units are not included in the weighted-average exercise price, as these grant types do not have an exercise price.

(5)
Includes 7,004,297 shares remaining available under the 2014 Omnibus Plan, 1,861,973 shares remaining available under the 2014 Amended and Restated Employee Stock Purchase Plan, and 346,432 shares remaining available under the Amended and Restated 2002 Deferred Compensation Plan. The 2014 Omnibus Plan uses a fungible stock pool under which each share issued pursuant to an option or stock appreciation right reduces the number of shares available by one share, and each share issued pursuant to awards other than options or stock appreciation right reduces the shares available by 1.704 shares. Assumes shares will be issued at maximum award level (200%) for outstanding performance stock units granted in fiscal 2015 (and whose performance period had not ended as of September 26, 2015).

Issuer Purchases of Securities

Period (1)
  Total Number
of Shares
Purchased
  Average
Price Paid
per Share
  Total Number of
Shares Purchased as
Part of Publicly
Announced Plan (2)
  Maximum
Remaining
Amount Available
Under the Plan
(in thousands) (2)
 

June 28, 2015 to July 25, 2015

    —     $ —       —     $ 264,466  

July 26, 2015 to August 21, 2015

    —     $ —       —     $ 1,264,466  

August 22, 2015 to September 26, 2015

    1,988,524   $ 57.81     1,988,524   $ 1,149,501  

Total

    1,988,524   $ 57.81     1,988,524        

(1)
Monthly information corresponds to our fiscal months during the fourth quarter of fiscal 2015.

(2)
All shares purchased during the period were made as part of plans approved at various times beginning in fiscal 2012, including the July 31, 2015 repurchase authorization of up to an additional $1.0 billion over the course of two years. In total, since 2012, the Company's Board has authorized the Company to repurchase up to a total of $3.5 billion of its outstanding common stock.

        See Note 15, Stockholders' Equity , of the Notes to Consolidated Financial Statements included in this Annual Report.

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Performance Graph

        Due to the inclusion of the Company in Standard & Poor's 500 Index in fiscal 2014, the following graph depicts the total return to stockholders from September 25, 2010 through September 26, 2015, relative to the performance of the Standard & Poor's 500 Index, the NASDAQ Composite Index, and the Standard & Poor's 500 Packaged Foods and Meats sector peer groups that include the Company. All indices shown in the graph and table below assume an investment of $100 on September 25, 2010 and the reinvestment of dividends paid since that date. The stock price performance shown in the graph is not necessarily indicative of future price performance.


COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Keurig Green Mountain, Inc., the S&P 500 Index, the NASDAQ Composite Index and the S&P 500 Packaged Foods & Meats Index

GRAPHIC

5 Year Cumulative Total Return

 
  9/25/2010   9/24/2011   9/29/2012   9/28/2013   9/27/2014   9/26/2015  

Keurig Green Mountain, Inc

  $ 100.00   $ 287.85   $ 65.54   $ 206.74   $ 363.35   $ 156.83  

NASDAQ Composite

  $ 100.00   $ 103.65   $ 136.22   $ 168.91   $ 202.57   $ 208.69  

S&P 500 Index

  $ 100.00   $ 101.14   $ 131.69   $ 157.17   $ 188.18   $ 187.02  

S&P 500 Packaged Foods and Meats

  $ 100.00   $ 113.34   $ 133.55   $ 163.64   $ 184.95   $ 212.99  

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Item 6.    Selected Financial Data

        The following data should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements of the Company, including the notes thereto, in Items 7 and 8, respectively, of this Annual Report in order to fully understand factors that may affect the comparability of the financial data. The following selected Consolidated Balance Sheet data as of September 26, 2015, and September 27, 2014 and selected Consolidated Statements of Operations for the fiscal years ended September 26, 2015, September 27, 2014 and September 28, 2013 are derived from our audited financial statements included in Item 8 of this Annual Report. The historical results do not necessarily indicate results expected for any future period.

        Our fiscal year ends on the last Saturday in September. Fiscal years 2015, 2014, 2013 and 2011 consist of 52 weeks. Fiscal 2012 consists of 53 weeks.

 
  Fiscal Years Ended  
 
  September 26,
2015 (5)
  September 27,
2014
  September 28,
2013
  September 29,
2012 (3)
  September 24,
2011 (1)
 
 
  In thousands, except per share data
 

Net sales

  $ 4,520,031   $ 4,707,680   $ 4,358,100   $ 3,859,198   $ 2,650,899  

Net income attributable to Keurig

  $ 498,275   $ 596,518   $ 483,232   $ 362,628   $ 199,501  

Net income per share-diluted

  $ 3.14   $ 3.74   $ 3.16   $ 2.28   $ 1.31  

Total assets

  $ 4,001,577   $ 4,797,307   $ 3,761,548   $ 3,615,789   $ 3,197,887  

Long-term debt, less current portion

    330,766   $ 140,937   $ 160,221   $ 466,984   $ 575,969  

Total stockholders' equity

  $ 2,709,358 (6) $ 3,458,681 (4) $ 2,635,570   $ 2,261,228   $ 1,912,215 (2)

Cash dividends declared per common share

  $ 1.15   $ 1.00   $ —     $ —     $ —    

(1)
Fiscal 2011 information presented reflects the acquisition of LJVH Holdings, Inc. and Subsidiaries ("Van Houtte") on December 17, 2010.

(2)
Fiscal 2011 stockholders' equity balance reflects the impact of the May 11, 2011 equity offering and concurrent private placement and the September 28, 2010 sale of common stock to Luigi Lavazza S.p.A. ("Lavazza").

(3)
Fiscal 2012 information presented reflects the sale of Van Houtte USA Holdings, Inc., also known as the Van Houtte U.S. Coffee Service business or the "Filterfresh" business, on October 3, 2011.

(4)
Fiscal 2014 stockholders' equity balance reflects the impact of the February 27, 2014 sale of common stock to Atlantic Industries, an indirect wholly owned subsidiary of The Coca-Cola Company, the February 28, 2014 accelerated share repurchase agreement and the March 28, 2014 sale of common stock to Lavazza.

(5)
Fiscal 2015 information presented reflects the acquisition of MDS Global Holdings p.l.c. ("Bevyz") on December 18, 2014.

(6)
Fiscal 2015 stockholders' equity balance reflects the impact of the repurchase of 5,231,991 shares of common stock from Lavazza on March 3, 2015.

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Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations

        The following discussion and analysis is intended to help you understand the results of operations and financial condition of Keurig Green Mountain, Inc. (together with its subsidiaries, the "Company", "Keurig", "we", "our", or "us"). You should read the following discussion and analysis in conjunction with our consolidated financial statements and related notes included elsewhere in this report.

Overview

        We believe that we are a leader in coffeemakers and specialty coffee in the United States and Canada. We consider ourselves an innovative, technology-driven, values-based personal beverage system company. Our multi-brand beverage and beverage system portfolio is aimed at changing the way consumers prepare and enjoy coffee and other beverages both at home and away from home. We develop and sell a variety of Keurig® beverage systems and, in addition to specialty coffee, produce and sell a variety of other specialty beverages in pods (including hot apple cider, hot and iced teas, iced coffees, iced fruit brews, hot cocoa and other beverages) for use with our Keurig® hot brewing systems. We also offer traditional whole bean and ground coffee in other package types including bags, fractional packages and cans.

        We launched the Keurig® Kold™ beverage system on a limited basis beginning in the first quarter of fiscal 2016. We believe the Keurig® Kold™ beverage system shares the same elements as the Keurig® hot beverage system: quality, convenience, choice and simplicity. The Keurig® Kold™ beverage system creates a wide variety of cold still and carbonated beverages, in a countertop footprint, using a Kold™ beverage pod. Kold™ beverage brands include partner brands with The Coca-Cola Company and licensed brands with the Dr Pepper Snapple Group, as well as our own brands. We expect to add additional beverage brands and new partners in the future. In the near term, we do not expect the Keurig® Kold™ beverage system to be profitable or for revenue from the Keurig® Kold™ beverage system to be material to the Company.

Products

Pods

        We offer hot system pods of varying sizes including single serve K-Cup®, Vue®, and K-Mug™ pods as well as multi-serve K-Carafe™ pods capable of producing a three to four cup carafe. 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 also procure Robusta bean coffee for use in certain blends. We carefully select our coffee beans and appropriately roast the coffees to optimize their taste and flavor differences. We manufacture and sell pods of our own brands and participating brands of a wide variety of coffee, tea, and other beverages through licensing and manufacturing agreements.

Hot System Brewers and Accessories

        We are a leader in sales of coffeemakers in the U.S. and Canada. During our 2015 fiscal year, we had the top seven best-selling at-home 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 Keurig® 2.0 brand names, we offer a variety of commercial and home use brewers for the away from home ("AFH") and at home ("AH") channels differentiated by features and size.

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        In addition, we have license agreements under which licensees manufacture, market and sell coffeemakers co-branded with "Keurig® Brewed". Licensees include Jarden Consumer Solutions selling a "Mr. Coffee®" branded brewer, Conair Corporation selling a "Cuisinart®" branded brewer through May 2016, and GE Appliances selling a "GE Café™" series refrigerator which includes a built in Keurig® K-Cup® brewing system.

        We offer a variety of accessories for the Keurig® brewing platforms and also sell other coffee-related equipment and accessories.

Other Products and Royalties

        We sell coffee in other package types in addition to pods 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.

        In recent years, growth in the coffee industry has come from the specialty coffee category in the U.S. and Canada. Single serve has been the fastest growing segment of the specialty coffee category. Concurrently, consumers are more frequently seeking to enjoy premium experiences within the comfort and convenience of their own homes, including the consumption of specialty coffee. We have benefited from these broad consumer trends and believe we will continue to be a leader in the hot beverage marketplace because of our carefully developed and distinctive advantages over our competitors, including quality, convenience and choice.

Strategy

        In recent years, our growth has been driven predominantly by an increase in adoption of Keurig® hot beverage systems, which include both the brewer,related pods and accessories. In fiscal 2015, approximately 95% of our consolidated net sales were attributed to the combination of Keurig® brewers, pods and related accessories.

        We believe the primary consumer benefits delivered by our Keurig® beverage systems are as follows:

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

    2
    Convenience—Keurig® beverage systems prepare beverages at the touch of a button with no mess, no fuss.

    3
    Choice—Keurig offers more than 550 individual hot varieties and 25 Kold 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, as well as sodas, sports hydration mixes, and flavored water beverages in pods.

        We see these benefits as being our competitive advantage and believe it's the combination of these attributes that make Keurig® beverage systems appealing to consumers. We are focused on building our brands, diversifying our product lines and profitably growing our business. We believe we can continue to grow sales by increasing consumer awareness of the Keurig® brand in the United States and Canada; expanding into new geographic regions; expanding consumer choice of coffee, tea and other beverages in our existing beverage systems; developing and introducing new beverage platforms; expanding sales in adjacent beverage industry segments; and/or selectively pursuing other synergistic opportunities.

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        Our business strategy involves using our consumer insights to develop innovative new brewing systems and beverages; continually improving and refining our current systems and beverages; and, developing and managing marketing programs to drive Keurig® beverage system adoption in order to generate ongoing demand for pods. We currently target opportunities primarily in American and Canadian households, foodservice, and office locations. Over the longer term, we also will work to expand our addressable opportunity globally. As part of our strategy, we work to sell our at-home hot beverage systems at attractive price points which result in losses, in order to drive the future sales of pods. As we introduce new innovative beverage systems such as the Keurig® 2.0 beverage system or the Keurig® Kold™ beverage system, we expect to experience higher appliance costs as we scale the related manufacturing processes followed by lower appliance cost structures as the supply chain creates more efficient manufacturing processes and incremental design changes lead to lower overall component and manufacturing costs.

        The key elements of our business strategy are as follows:

    Increasing adoption of the Keurig® hot brewing systems in the United States and Canada;

    Expanding beverage choice through both our owned and partner brand offerings;

    Expanding in current channels;

    Launching new, innovative beverage system technologies and platforms; and,

    Continuing international expansion.

        Increasing adoption of the Keurig ® hot brewing systems in the United States and Canada.     While we are positioned as a leader in the hot beverage marketplace, we have opportunities in the United States and Canada to increase brand awareness and household penetration. In our fiscal year 2014 we launched our Keurig® 2.0 beverage system—the first Keurig® brewer to brew both a single cup and a carafe. Extending the Keurig® value proposition to include a carafe option for at-home users allows us to target an incremental need of consumers for brewing larger volumes quickly and simply. For holiday 2015 (our first quarter of fiscal 2016) we will debut new consumer communication highlighting the benefits of Keurig's single-serve options, as well as the broad variety and choice in our system. These messages will be communicated to consumers through advertising campaigns, on brewer boxes and through in-store marketing and merchandising.

        For holiday 2015 we expect to sell our brewers across a wider range of price points than last holiday season, including lower price points than last holiday season, which we believe will appeal to consumers. The Keurig MINI Plus model will be back in broad distribution as will our entry level K200 model in the Keurig® 2.0 series. We expect to sell a greater percentage of these lower priced models in fiscal 2016 compared to fiscal 2015, which will have a negative impact on our gross margins. We also expect to sell a greater percentage of Keurig® 2.0 series brewers in fiscal 2016 compared to fiscal 2015. These 2.0 appliances have higher brewer costs than our earlier reservoir model appliances which will have a further negative impact on gross margin.

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        Expanding beverage choice through both our owned and partner brand offerings.     In fiscal 2015, we continued expanding consumer choice in the Keurig® hot beverage system by entering into or extending a number of business relationships across multiple channels and geographies. Expanded or new brand offerings and partnerships in fiscal 2015 for the Keurig® hot beverage system included: the launch of Green Mountain Coffee® Organic, a new line of premium coffees that are certified as both organic and Fair Trade Certified™; a partnership with Community Coffee Company; an agreement to launch illy® brand to K-Cup® pods beginning in Fall 2015; the June 2015 launch of Laughing Man® brand, a new selection of gourmet coffees offered in K-Cup® pods following our 2014 acquisition of the Laughing Man brand; an expanded ten year partnership with Caribou Coffee for the manufacturing, marketing, distribution, and sale of Caribou Coffee in Keurig® pod formats; and a multi-year manufacturing and distribution agreement with Reily Foods Company for New England® brand coffee, New Orleans Famous French Market Since 1890® brand coffee, and Luzianne® brand iced tea pods. We believe these new brand and product offerings fuel excitement for current Keurig® brewer owners and users; raise system awareness; attract new consumers to the system; and promote expanded use of Keurig® beverage systems. These relationships are established with careful consideration of potential economics. We expect to continue to enter into these mutually beneficial relationships in our efforts to expand choice and diversify our portfolio of brands with the expectation that they will lead to increased Keurig® beverage system awareness and household adoption, in part through the participating brands' advertising and merchandising activities.

        Expanding in current channels.     We have identified and are targeting specific opportunities within our existing AH and AFH channels. For example, in the AH channel, we expanded our partnerships with Dunkin' Donuts and The J.M. Smucker Company by signing agreements in the second quarter of fiscal 2015 for the manufacturing, marketing, distribution and sale of Dunkin' K-Cup® pods at retailers nationwide in the U.S. and Canada, and online.

        Launching new, innovative beverage system technologies and platforms.     We are also focused on continued innovation in both hot and cold beverage systems. Some of our recent initiatives and planned product introductions include:

    The launch of our Keurig® Kold™ beverage system on a limited basis beginning in late September 2015 (after the end of fiscal 2015). We believe the Keurig® Kold™ beverage system shares the same elements as the Keurig® hot beverage system: quality, convenience, choice and simplicity. The Keurig® Kold™ beverage system mixes and dispenses a wide variety of cold still and carbonated beverages in a countertop footprint using a Kold™ beverage pod. The initial launch included select key partner brands from The Coca-Cola Company and Dr Pepper Snapple Group, along with a wide variety of our own carbonated and non-carbonated brands. Retailer assortment during the initial launch varies, depending upon how many beverage varieties individual retailers choose to stock and how we choose to manage our product mix in our plants. We expect to add additional beverage brands and new partners to the Keurig® Kold™ beverage system in the future.

    Keurig® 2.0, the first Keurig® brewer to brew both a single cup and up to a three to four-cup carafe from a Keurig® brand pod, provides Keurig consumers with even greater beverage choice with the same Keurig simplicity and convenience they expect from Keurig. Keurig® 2.0's Keurig® 2.0 Brewing Technology™ recognizes the inserted Keurig® pod in order to optimize customized beverage settings. The Keurig® 2.0 Brewing Technology™ ensures that the Keurig® 2.0 system delivers on the promise of excellent quality beverages, produced simply and consistently, every single time.

        Continuing international expansion.     We will continue to launch our Keurig® hot system global platform in targeted countries outside of North America. In fiscal 2014, we launched a Keurig® brewer in the AFH channel in the United Kingdom.

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        Licensing and manufacturing arrangements.     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) accounted for more than 10% of our consolidated net sales in fiscal 2015. We analyze the impact of each arrangement on consolidated net sales on an individual basis. 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. However, increasing competition from contract pod manufacturers or decisions by our current brand partners or retailer private label customers to vertically integrate with respect to pod manufacturing may result in intensified price compression as existing contracts expire.

        Management is focused on executing our growth strategy to drive Keurig® beverage brewer adoption in households and offices in the U.S. and Canada in order to generate ongoing demand for pods.

        We compete not only with other widely advertised branded products, but also with private label or generic products that are generally sold at lower prices.

        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.

        Warranty.     We offer a one-year warranty on all Keurig® hot beverage systems 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® hot beverage systems 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 offer a comparable warranty on all Keurig® Kold™ brewers sold and will similarly provide for the estimated cost of product warranties at the time product revenue is recognized. 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 launch new products, including Keurig® Kold™, 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.

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Consolidated Results of Operations

        As described in our Forward-Looking Statements section on page 1 of this Annual Report on Form 10-K, our results of operations and period-to-period comparisons of such results, particularly at a segment level, may not be indicative of future operating results. As we and our industry evolve, we expect to face new challenges with respect to transformation from a coffee company to a multi-beverage company, our introduction of innovative products and the changing competitive landscape within the coffee industry, generally, and the single serve beverage category. These challenges can occur at various stages, including design, supply chain and sales cycle. Our public forecasts regarding the expected performance of our business and future operating results reflect current assumptions and judgments that are subject to significant uncertainties, including these and other challenges as well as shifting category dynamics, and many of the assumptions could prove incorrect. The following discussions of comparative results among periods, including the discussion of segment results, should be viewed in this context.

        For fiscal 2015, the Company's net sales of $4,520.0 million represented a decline of 4% over fiscal 2014. Approximately 95% of our fiscal 2015 consolidated net sales were attributed to the combination of Keurig® hot system brewers, pods and related accessories. Gross profit for fiscal 2015 was $1,607.5 million, or 35.6% of net sales, as compared to $1,815.9 million, or 38.6% of net sales, in fiscal 2014. Selling, operating, and general and administrative expenses ("SG&A") decreased 5% to $826.9 million in fiscal 2015 from $868.6 million in fiscal 2014. As a percentage of sales, SG&A expenses decreased to 18.3% in fiscal 2015 from 18.5% in fiscal 2014. Our operating margin declined to 16.9% in fiscal 2015 from 20.1% in fiscal 2014.

        We generated $754.9 million in cash from operations during fiscal 2015 as compared to $719.4 million in fiscal 2014. During fiscal 2015, $330.0 million was drawn against our revolving credit facility, of which a portion was used to fund $158.7 million in repayments of our long-term debt. We used cash during fiscal 2015 primarily to repurchase shares of our common stock for $1,033.3 million, fund capital expenditures of $411.1 million, acquire MDS Global Holding p.l.c. ("Bevyz") for $180.7 million and pay dividends of $175.7 million.

        We regularly analyze our short-term and long-term cash requirements to continue to grow the business. We expect that most of our cash generated from operations will continue to be used to fund cash dividends, share repurchases, capital expenditures and the working capital required for our growth over the next few years. We will also use available funds from our existing credit facilities, as needed, to fund cash dividends, share repurchases, capital expenditures and working capital.

Business Segments

        We manage our operations through two operating segments, a Domestic segment including all U.S. Operations and immaterial operations related to international expansion, and a Canada segment including all Canadian operations. See Note 4, Segment Reporting , of the Notes to Consolidated Financial Statements included in this Annual 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, legal expenses, and other professional fees.

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Basis of Presentation

        Included in this presentation are discussions and reconciliations of income before taxes, net income and diluted earnings per share in accordance with accounting principles generally accepted in the United States of America ("GAAP") to income before taxes, 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 antitrust litigation, the completed SEC inquiry as it relates to prior periods, and associated pending securities and stockholder derivative class action litigation; non-cash related items such as amortization of identifiable intangibles and losses on fixed asset impairment and abandonment write-downs on Keurig® BOLT® and certain other packaging lines, as well as restructuring expenses related to our multi-year productivity program, 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 antitrust litigation expenses 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 the performance of the Company. 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. Although other companies report non-GAAP net income and diluted earnings per share, numerous methods may exist for calculating a company's non-GAAP net income and diluted earnings per share. As a result, the method used by our management to calculate non-GAAP measures may differ from the methods used by other companies to calculate their non-GAAP measures.

Acquisition

        On December 18, 2014, we completed the acquisition of 100% of the outstanding equity of Bevyz, a manufacturer and distributor of an all-in-one drink system, for total cash consideration of $180.7 million, net of cash acquired. Prior to the acquisition, we owned approximately 15% of the outstanding equity of Bevyz. We currently intend to hold the rights to the technology acquired to prevent others from using such technology.

Summary Financial Data of the Company

        Our fiscal year ends on the last Saturday in September. Fiscal years 2015, 2014 and 2013 represent the years ended September 26, 2015, September 27, 2014 and September 28, 2013, respectively. Each of fiscal years 2015, 2014 and 2013 consisted of 52 weeks.

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

 
  Fiscal 2015   Fiscal 2014   Fiscal 2013  

Net sales

    100.0 %   100.0 %   100.0 %

Cost of sales

    64.4 %   61.4 %   62.8 %

Gross profit

    35.6 %   38.6 %   37.2 %

Selling and operating expenses

    11.9 %   11.9 %   12.9 %

General and administrative expenses

    6.4 %   6.5 %   6.7 %

Restructuring expenses

    0.3 %   —   %   —   %

Operating income

    16.9 %*   20.1 %*   17.6 %

Other income, net

    0.0 %   0.0 %   0.0 %

Gain on financial instruments, net

    0.2 %   0.2 %   0.1 %

Loss on foreign currency, net

    (0.5 )%   (0.4 )%   (0.3 )%

Interest expense

    —   %   (0.2 )%   (0.4 )%

Income before income taxes

    16.6 %   19.6 %*   17.0 %

Income tax expense

    (5.6 )%   (6.9 )%   (5.9 )%

Net Income

    11.0 %   12.7 %   11.1 %

Net income attributable to noncontrolling interests

    0.0 %   0.0 %   0.0 %

Net income attributable to Keurig

    11.0 %   12.7 %   11.1 %

*
Does not add 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)   2015 over 2014   2014 over 2013  
 
  Fiscal 2015   Fiscal 2014   Fiscal 2013   $ Increase
(Decrease)
  % Increase
(Decrease)
  $ Increase
(Decrease)
  % Increase
(Decrease)
 

Domestic

  $ 3,979.6   $ 4,083.3   $ 3,725.0   $ (103.7 )   (3 )% $ 358.3     10 %

Canada

    540.4     624.4     633.1     (84.0 )   (13 )%   (8.7 )   (1 )%

Total net sales

  $ 4,520.0   $ 4,707.7   $ 4,358.1   $ (187.7 )   (4 )% $ 349.6     8 %

 

 
  Operating income (loss) (in millions)   2015 over 2014   2014 over 2013  
 
  Fiscal 2015   Fiscal 2014   Fiscal 2013   $ Increase
(Decrease)
  % Increase
(Decrease)
  $ Increase
(Decrease)
  % Increase
(Decrease)
 

Domestic

  $ 847.4   $ 1,016.6   $ 826.1   $ (169.2 )   (17 )% $ 190.5     23 %

Canada

    74.4     102.6     87.7     (28.2 )   (27 )%   14.9     17 %

Corporate—Unallocated

    (156.4 )   (172.0 )   (148.6 )   15.6     9 %   (23.4 )   (16 )%

Total operating income

  $ 765.4   $ 947.2   $ 765.2   $ (181.8 )   (19 )% $ 182.0     24 %

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Revenue

Company Summary

        The following table presents consolidated net sales by major product category:

 
  Net Sales (in millions)   2015 over 2014   2014 over 2013  
 
  Fiscal 2015   Fiscal 2014   Fiscal 2013   $ Increase
(Decrease)
  % Increase
(Decrease)
  $ Increase
(Decrease)
  % Increase
(Decrease)
 

Pods

  $ 3,645.1   $ 3,604.5   $ 3,187.3   $ 40.6     1 % $ 417.2     13 %

Brewers and accessories

    632.6     822.3     827.6     (189.7 )   (23 )%   (5.3 )   (1 )%

Other products and royalties

    242.3     280.9     343.2     (38.6 )   (14 )%   (62.3 )   (18 )%

Total net sales

  $ 4,520.0   $ 4,707.7   $ 4,358.1   $ (187.7 )   (4 )% $ 349.6     8 %

Fiscal 2015

        Net sales for fiscal 2015 decreased by $187.7 million, or 4%, to $4,520.0 million as compared to $4,707.7 million reported in fiscal 2014. The 4% decrease includes the unfavorable impact of foreign currency exchange rates which reduced net sales by approximately 1%.

        The primary drivers of the 4% decrease in our net sales as compared to the prior year were a $189.7 million, or 23%, decrease in Keurig® brewer and accessory net sales and a $38.6 million, or 14%, net decrease in other products, partially offset by a $40.6 million, or 1%, increase in total pod net sales.

        The decrease in brewer and accessory net sales as compared to the prior year was primarily driven by a $174.4 million, or 23%, decrease in brewer net sales and a $15.3 million, or 26%, decrease in accessory net sales. The decrease in brewer net sales was primarily driven by (i) an approximate 16% decrease in volume as compared to the prior year period driven largely by slower than expected transition to the Keurig® 2.0 system, weaker sales of MINI Plus brewers largely due to a voluntary recall during the 2014 holiday (first quarter of fiscal year 2015) and higher inventory levels with retail customers which negatively impacted shipments in the quarters after the first quarter of fiscal year 2015; (ii) an approximate 5% decrease in brewer net prices due to heavier promotions to work through inventory; (iii) an approximate 1% decrease due to the impact of foreign currency exchange; and (iv) an approximate 1% decrease due to brewer product mix. The decrease in accessory net sales was driven in part by a decrease in net sales of the My K-Cup accessory during the first three quarters of fiscal 2015 during which time it was not widely available for sale (prior to its reintroduction in the fourth quarter of fiscal 2015).

        The increase in pod net sales as compared to the prior year was driven by an approximate 7% increase due to volume and an approximate 2% increase due to net price realization, partially offset by (i) an approximate 7% decrease due to sales mix and (ii) an approximate 1% decrease due to the impact of foreign currency exchange rates. During the fiscal year, the positive price realization was attributable to a price increase, while the negative mix was attributable to the fact that we sold proportionately more pods to partner and private label brand owners, where there is a lower wholesale selling price, than to retailers and consumers. Factors which contributed to the mix shift were adding more brands, including private label, to our pod offerings and lower unit share of our owned and licensed brands as a percentage of our total pod sales. We expect the impact on net sales due to mix change will fluctuate over time; and we believe this negative mix trend may continue as long as pod sales of our owned and licensed brands experience lower unit share. In addition, increasing competition among pod manufacturers may result in price compression and the loss of licensing or manufacturing rights to brands.

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        Net sales of other products, primarily consisting of coffee in traditional package formats and our AFH office coffee services business, decreased $38.6 million, or 14%, as compared to the prior year primarily due to the unfavorable impact of foreign exchange rates, the loss of a customer in our AFH channel and our decision to focus and allocate resources toward our pod business.

Fiscal 2014

        Net sales for fiscal 2014 increased by $349.6 million, or 8%, to $4,707.7 million as compared to $4,358.1 million reported in fiscal 2013. The 8% increase includes the unfavorable impact of foreign currency exchange rates which reduced net sales by approximately 1%.

        The primary drivers of the 8% increase in our net sales as compared to the prior year were a $417.2 million, or 13%, increase in total pod net sales partially offset by a $5.3 million, or 1%, decrease in Keurig® brewer and accessory sales and a $62.3 million, or 18%, net decrease in other products.

        The increase in pod net sales as compared to the prior year was driven by an approximate 18 percentage point increase due to volume, partially offset by (i) an approximate 3 percentage point decrease due to net price realization, (ii) an approximate 1 percentage point decrease due to sales mix and (iii) an approximate 1 percentage point decrease due to the impact of foreign currency exchange rates. During the fiscal year, the negative price realization was attributable to a price reduction, while the negative mix was attributable to the fact that we sold proportionately more packs to brand owners, where there is a lower wholesale selling price, than to retailers and consumers, where there is a higher wholesale average selling price.

        The decrease in brewer and accessory net sales as compared to the prior year was primarily driven by a $9.8 million decrease in brewer net sales offset by a $4.5 million increase in accessory net sales. The decrease in brewer net sales was primarily driven by (i) an approximate 10 percentage point decrease due to brewer net price realization resulting from a continued strategic decision to drive brewer volume and to further expand the installed base of our Keurig® hot platform and (ii) a roughly 1 percentage point decrease due to the impact of foreign currency exchange partially offset by (i) an approximate 6 percentage point increase due to brewer sales volume and (ii) an approximate 3 percentage point increase due to brewer sales mix.

        Net sales of other products decreased $62.3 million, or 18%, as compared to the prior year primarily due to the continuing demand shift from traditional coffee package format to pods.

Domestic

Fiscal 2015

        The Domestic segment net sales decreased by $103.7 million, or 3%, to $3,979.6 million in fiscal 2015 as compared to $4,083.3 million in fiscal 2014. The decrease was due primarily to a $154.2 million, or 21%, decrease related to net sales of brewers and accessories, partially offset by a $61.9 million, or 2%, increase in pod net sales.

Fiscal 2014

        The Domestic segment net sales increased by $358.3 million, or 10%, to $4,083.3 million in fiscal 2014 as compared to $3,725.0 million in fiscal 2013. The increase was due primarily to a $373.7 million, or 13%, increase related to sales of pods.

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Canada

Fiscal 2015

        Canada segment net sales decreased by $84.0 million, or 13%, to $540.4 million in fiscal 2015 as compared to $624.4 million in fiscal 2014. Excluding a $64.9 million, or 10%, decrease related to the unfavorable impact of foreign currency exchange rates, Canada segment net sales decreased $19.1 million, or 3%, over the prior year period. This decrease was due to (i) a $29.9 million, or 35%, decrease related to sales of Keurig® brewers and accessories and (ii) a $8.2 million, or 4%, decrease in sales of other products, such as coffee sold in traditional package formats and our AFH coffee services business, driven by our decision to focus and allocate resources toward our pod business. This decrease was partially offset by a $19.0 million, or 5%, increase related to the sale of pods.

Fiscal 2014

        Canada segment net sales decreased by $8.7 million, or 1%, to $624.4 million in fiscal 2014 as compared to $633.1 million in fiscal 2013. Excluding a $39.0 million, or 6%, decrease related to the unfavorable impact of foreign currency exchange rates, Canada segment net sales increased $30.3 million, or 5%, over the prior year period. This increase was due primarily to a $65.7 million, or 21%, increase related to the sale of pods, partially offset by (i) a $24.3 million, or 11%, decrease in sales of other products, such as coffee sold in traditional package formats, driven by a demand shift from coffee sold in traditional package formats to pods, and (ii) a $11.1 million, or 11%, decrease related to sales of Keurig® brewers and accessories, driven primarily by a decrease in net price realization related to brewers.

Gross Profit

Fiscal 2015

        Gross profit for fiscal 2015 was $1,607.5 million, or 35.6% of net sales, as compared to $1,815.9 million, or 38.6% of net sales, in fiscal 2014. The decrease in gross profit as compared to the prior year was primarily attributable to (i) a decrease of approximately 160 basis points related to brewer mix primarily due to selling proportionately more Keurig® 2.0 brewers, which carry a higher cost, versus Keurig® 1.0 brewers; (ii) a decrease of approximately 160 basis points due to higher obsolescence expense of finished goods; (iii) a decrease of approximately 140 basis points due to unfavorable green coffee costs; and (iv) a decrease of approximately 90 basis points related to pod mix. This was partially offset by an increase of approximately 250 basis points related to a shift in sales mix between pods, brewers and accessories, and other products.

        In the fourth quarter of fiscal 2015 we extended the shelf life of certain of our owned and licensed K-Cup® pods which we expect will decrease our reserves for obsolescence of finished goods and have a positive impact on our gross margin.

Fiscal 2014

        Gross profit for fiscal 2014 was $1,815.9 million, or 38.6% of net sales as compared to $1,619.4 million, or 37.2% of net sales, in fiscal 2013. The increase in gross margin as compared to the prior year was primarily attributable to (i) an increase of approximately 330 basis points due to favorable green coffee costs, (ii) an increase of approximately 120 basis points due to logistics productivity and (iii) an increase of approximately 90 basis points due to a shift in sales mix between Keurig® brewers and pods. This was partially offset by (i) a decrease of approximately 210 basis points due to lower net price realization associated with both pods and brewers, (ii) a decrease of approximately 100 basis points due to brewer and pod sales mix, (iii) a decrease of approximately 90 basis points due to increased pod packaging material costs and (iv) a decrease of approximately 50 basis points due to higher warranty expense.

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Selling, General and Administrative Expenses

Fiscal 2015

        Selling, operating, and general and administrative ("SG&A") expenses decreased 5% to $826.9 million in fiscal 2015 from $868.6 million in fiscal 2014. As a percentage of sales, SG&A expenses decreased to 18.3% in fiscal 2015 compared to 18.5% in the prior year. The 5% decrease in fiscal 2015 over the prior year period was primarily attributed to cost reduction initiatives that commenced in the third quarter of fiscal 2015 across the Domestic segment, the Canada segment, and Corporate, driven by decreases in variable compensation expenses and variable marketing expenses. These reductions more than offset increased expenses related to research and development and selling, general and administrative expenses related to Kold.

Fiscal 2014

        Selling, operating, and general and administrative ("SG&A") expenses increased 2% to $868.6 million in fiscal 2014 from $854.2 million in fiscal 2013. As a percentage of sales, SG&A expenses decreased to 18.5% in fiscal 2014 from 19.6% in the prior year period. The 2% increase in fiscal 2014 over the prior year period was primarily attributable to increased information technology expenditures to support infrastructure and an increase in research and development expenditures to support the launch of new product platforms, partially offset by decreases in marketing and sales related activity.

Productivity and Restructuring Programs

        On July 31, 2015, the Board approved a multi-year productivity program intended to reduce structural costs and streamline organization structures to drive efficiency. The program is expected to generate approximately $300 million in savings over the next three years with approximately $100 million of savings anticipated in fiscal 2016.

        The following table details the cumulative pre-tax charges expected to be incurred for our multi-year productivity program (in millions):

Restructuring expenses (pre-tax)
  2015 Expenses
Incurred
  2016 Estimated
Expenses
  Cumulative
Estimated
Expenses
 

Domestic

  $ 12.0   $ 0.6   $ 12.6  

Canada

    2.5     2.7     5.2  

Corporate—Unallocated

    0.8     —       0.8  

Total

  $ 15.3   $ 3.3   $ 18.6  

Other charges (pre-tax)

                   

Domestic

  $ 1.2   $ 10.3   $ 11.5  

Canada

    —       0.9     0.9  

Corporate—Unallocated

    —       —       —    

Total

  $ 1.2   $ 11.2   $ 12.4  

Estimated cash costs

 
$

12.4
 
$

10.0
 
$

22.4
 

Estimated non-cash costs

    4.1     4.5     8.6  

Total

  $ 16.5   $ 14.5   $ 31.0  

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        Implementation of the productivity program is expected to result in cumulative pre-tax restructuring charges of approximately $18.6 million through the end of fiscal 2016, primarily including costs associated with employee terminations and other business transition costs and accelerated depreciation on assets as a result of a business exit plan. In addition, we expect to incur certain costs in the implementation of our productivity program that will not be classified as restructuring expenses, but will be classified as a component of operating income. The cumulative pre-tax other productivity initiative charges are expected to be approximately $12.4 million through the end of fiscal 2016.

        We recorded a pretax restructuring charge of $15.3 million in the fourth quarter of fiscal 2015, of which approximately $11.5 million represents employee severance related costs that will be settled in cash. In fiscal 2015, cash spent for restructuring activities was approximately $3.0 million. See Note 5 Restructuring Programs , of the Notes to the audited Consolidated Financial Statements included in this Annual Report.

Segment Operating Income (Loss)

Fiscal 2015

        Operating income for the Domestic segment decreased by $169.2 million, or 17%, as compared to the prior year period which was primarily attributable to sales mix for brewers and pods, obsolescence and unfavorable green coffee costs. Operating income for the Canada segment decreased by $28.2 million, or 27%, as compared to the prior year period which was primarily attributable to sales mix and unfavorable green coffee costs. The operating loss for Corporate—Unallocated decreased by $15.6 million, or 9%, as compared to the prior year period which was primarily due to decreases in compensation and professional fees, including legal expenses.

Fiscal 2014

        Operating income for the Domestic segment increased by $190.5 million, or 23%, as compared to the prior year period which was primarily attributable to higher sales volume for pods and favorable green coffee costs. Operating income for the Canada segment increased by $14.9 million, or 17%, as compared to the prior year period which was primarily attributable to favorable green coffee costs and logistics productivity. The operating loss for Corporate—Unallocated increased by $23.4 million, or 16%, as compared to the prior year period which was primarily due to facilities expenses.

Gain (Loss) on Financial Instruments

Fiscal 2015

        We incurred $8.1 million in net gains on financial instruments not designated as hedges for accounting purposes during fiscal 2015 as compared to $8.3 million in net gains during fiscal 2014. For fiscal 2015 and 2014, the net gains were primarily attributable to the fair value adjustment of our cross currency swap, which hedges the risk in currency movements on an intercompany note denominated in Canadian currency.

Fiscal 2014

        We incurred $8.3 million in net gains on financial instruments not designated as hedges for accounting purposes during fiscal 2014 as compared to $5.5 million in net gains during fiscal 2013. For fiscal 2014 and 2013, the net gains were primarily attributable to the fair value adjustment of our cross currency swap, which hedges the risk in currency movements on an intercompany note denominated in Canadian currency.

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Foreign Currency Exchange Gain (Loss), Net

Fiscal 2015

        We have certain assets and liabilities that are denominated in foreign currencies. During fiscal 2015, we incurred a net foreign currency loss of approximately $22.2 million as compared to a net loss of $19.7 million during fiscal 2014. The net foreign currency exchange losses were both 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.

Fiscal 2014

        We have certain assets and liabilities that are denominated in foreign currencies. During fiscal 2014, we incurred a net foreign currency loss of approximately $19.7 million as compared to a net loss of $12.6 million during fiscal 2013. The net foreign currency exchange losses were both 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

Fiscal 2015

        Interest expense was $1.9 million in fiscal 2015, as compared to $11.7 million in fiscal 2014. The decrease in interest expense was primarily due higher capitalized interest expense during fiscal 2015 as compared to fiscal 2014, primarily attributable to higher capital expenditures.

Fiscal 2014

        Interest expense was $11.7 million in fiscal 2014, as compared to $18.2 million in fiscal 2013. The decrease in interest expense was primarily due to lower average outstanding debt during fiscal 2014 as compared to the average outstanding debt during fiscal 2013.

Income Taxes

Fiscal 2015

        Our effective income tax rate was 33.6% for fiscal 2015 as compared to a 35.4% effective tax rate fiscal 2014. The effective tax rate for the prior year period was primarily impacted by the release of a $5.9 million uncertain tax position due to the expiration of the statute of limitations and $5.9 million of stock options deductions. The effective tax rate for the current year period primarily benefited from discrete items including a net tax reduction of $12.3 million for changes primarily related to inter-company transfer pricing, and Federal and State tax credits. In addition, the Company released $5.3 million of uncertain tax positions and benefited from $4.1 million of stock option deductions and $4.6 million of qualified inventory donations in the current year.

Fiscal 2014

        Our effective income tax rate was 35.4% for fiscal 2014 as compared to a 34.7% effective tax rate for fiscal 2013. The higher effective rate in fiscal 2014 was primarily attributable to a reduction in our available research and development federal tax credit.

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Net Income, Non-GAAP Net Income and Diluted EPS

        Net income in fiscal 2015 was $498.3 million, a decrease of $98.2 million or 16%, as compared to $596.5 million in fiscal 2014. Company net income in fiscal 2013 was $483.2 million. Non-GAAP net income for fiscal 2015, when excluding (i) legal and accounting expenses related to the completed SEC inquiry as it relates to prior periods and associated pending securities and stockholder derivative class action litigation, which is ongoing, (ii) legal expenses related to antitrust litigation, (iii) amortization of identifiable intangibles related to the Company's acquisitions, (iv) fixed asset impairment and abandonment write-downs on Keurig® BOLT® and other packaging lines, and (v) restructuring and productivity initiative expenses related to our multi-year productivity program, decreased 11% to $565.8 million from $632.9 million non-GAAP net income in fiscal 2014. Fiscal 2014 non-GAAP net income, when excluding amortization of identifiable intangibles related to the Company's acquisitions, legal and accounting expenses related to the completed SEC inquiry and associated pending securities and stockholder derivative class action litigation, which is ongoing, and legal expenses related to antitrust litigation, increased 22% to $632.9 million from $517.6 million in fiscal 2013. Non-GAAP net income in fiscal 2013 was $517.6 million, which excludes transaction-related expenses amortization of identifiable intangibles related to the Company's acquisitions and legal and accounting expenses related to the completed SEC inquiry and associated pending securities and stockholder derivative class action litigation.

        Company diluted EPS was $3.14 per share in fiscal 2015, as compared to $3.74 per share in fiscal 2014 and $3.16 per share in fiscal 2013. Non-GAAP diluted EPS was $3.56 per share in fiscal 2015, as compared to $3.97 per share in fiscal 2014 and $3.39 per share in fiscal 2013.

        The following tables show a reconciliation of operating income, net income and diluted EPS to non-GAAP operating income, net income and non-GAAP diluted EPS for fiscal years 2015, 2014 and 2013 (in thousands, except per share data):

 
  Fiscal 2015   Fiscal 2014   Fiscal 2013  

Operating income

  $ 765,424   $ 947,241   $ 765,227  

Expenses related to SEC inquiry and pending litigation (1)

    1,442     3,130     4,910  

Expenses related to antitrust litigation (2)

    5,541     7,771     —    

Amortization of identifiable intangibles (3)

    48,148     43,032     45,379  

Restructuring and productivity initiative expenses (4)

    16,492     —       —    

Impairment and abandonment of packaging lines (5)

    23,975     —       —    

Non-GAAP operating income

  $ 861,022   $ 1,001,174   $ 815,516  

 

 
  Fiscal 2015   Fiscal 2014   Fiscal 2013  

Net income attributable to Keurig

  $ 498,275   $ 596,518   $ 483,232  

After tax:

                   

Expenses related to SEC inquiry and pending litigation (1)

    927     2,023     3,208  

Expenses related to antitrust litigation (2)

    3,699     5,020     —    

Amortization of identifiable intangibles (3)

    35,516     29,324     31,128  

Restructuring and productivity initiative expenses (4)

    11,168     —       —    

Impairment and abandonment of packaging lines (5)

    16,236     —       —    

Non-GAAP net income attributable to Keurig

  $ 565,821   $ 632,885   $ 517,568  

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  Fiscal 2015   Fiscal 2014   Fiscal 2013  

Diluted income per share

  $ 3.14   $ 3.74   $ 3.16  

After tax:

                   

Expenses related to SEC inquiry and pending litigation (1)

  $ 0.01   $ 0.01   $ 0.02  

Expenses related to antitrust litigation (2)

  $ 0.02   $ 0.03   $ —    

Amortization of identifiable intangibles (3)

  $ 0.22   $ 0.18   $ 0.20  

Restructuring and productivity initiative expenses (4)

  $ 0.07   $ —     $ —    

Impairment and abandonment of packaging lines (5)

  $ 0.10   $ —     $ —    

Non-GAAP net income per share

    3.56   $ 3.97 * $ 3.39 *

*
Does not add due to rounding.

(1)
Represents legal and accounting expenses, net of income taxes of $0.5 million, $1.1 million and $1.7 million for fiscal 2015, fiscal 2014 and fiscal 2013, respectively, related to the completed SEC inquiry and pending securities and stockholder derivative class action litigation classified as general and administrative expense. Income taxes were calculated at our effective tax rate.

(2)
Represents legal expenses, net of income taxes of $1.8 million and $2.8 million for fiscal 2015 and 2014, respectively, related to antitrust litigation. Income taxes were calculated at our effective tax rate for the period in which the expenses were incurred.

(3)
Represents the amortization of intangibles, net of income taxes of $12.6 million for fiscal 2015, $13.7 million for fiscal 2014, and $14.3 million for fiscal 2013, related to the Company's acquisitions classified as general and administrative expense. Income taxes were calculated at our deferred tax rates.

(4)
Represents expenses related to our restructuring and productivity initiative program, net of income taxes of $5.3 million for fiscal 2015. Income taxes were calculated at our effective tax rate for the period in which the expenses were incurred.

(5)
Represents the loss on impairment and write-downs on certain packaging lines, net of income taxes of $7.7 million for fiscal year 2015. Income taxes were calculated at our effective tax rate for the period in which the expenses were incurred.

Liquidity and Capital Resources

        We have principally funded our operations, working capital needs, capital expenditures, share repurchases and cash dividends from operations, equity offerings and borrowings under our credit facilities. At September 26, 2015, we had $331.0 million in outstanding debt, $120.5 million in capital lease and financing obligations, $59.3 million in cash and cash equivalents and $915.1 million of working capital (including cash). At September 27, 2014, we had $160.0 million in outstanding debt, $118.5 million in capital lease and financing obligations, $761.2 million in cash and cash equivalents and $1,602.5 million of working capital (including cash).

        Our cash and cash equivalents totaled $59.3 million and $761.2 million as of September 26, 2015, and September 27, 2014, respectively. We actively manage our cash and cash equivalents in order to internally fund our operating needs, make scheduled interest and principal payments on our borrowings, invest in our innovation pipeline and business growth opportunities, and return cash to stockholders through common stock cash dividend payments and share repurchases.

        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. As of September 26, 2015, we had $28.8 million of cash and cash equivalents held in international jurisdictions which will be used to fund capital and other cash requirements of international operations.

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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, excluding the impact of the Bevyz acquisition, and non-cash items relating to depreciation and amortization.

        Net cash provided by operating activities was $754.9 million in fiscal 2015. During fiscal 2015, we generated $498.6 million in net income. Significant non-cash items primarily consisted of $265.7 million in depreciation and amortization expense and $114.4 million in charges related to our provision for sales returns. Other significant changes in assets and liabilities affecting net cash provided by operating activities were (i) a decrease in inventories of $128.4 million, primarily attributable to decreases in brewer and pod inventories, where, in the prior year, the company was preparing for its seasonal increase in sales volume and inventory build in advance of the go-live of components of our new enterprise-wise system solution; (ii) a decrease in accounts payable and accrued expense of $155.9 million, primarily attributable to decreases in accounts payable, accrued bonus compensation, and accrued customer incentives and promotions; (iii) a decrease in income tax payable of $64.3 million; offset by increases in accounts receivable of $24.3 million and other current assets of $23.6 million.

Investing Activities:

        Investing activities in fiscal 2015 primarily included $180.7 million of cash used in the acquisition of Bevyz and $411.1 million of capital expenditures for equipment and building improvements, primarily related to supporting new product platforms.

        Capital expenditures were $411.1 million in fiscal 2015. Capital expenditures incurred on an accrual basis during fiscal 2015 consisted primarily of $250.6 million related to new product platforms, primarily related to Kold, $34.6 million related to facilities and related infrastructure, $38.3 million related to information technology infrastructure and systems, $19.4 million related to coffee processing and other equipment, and $25.2 million related to increasing packaging capabilities for the Keurig® brewer platforms. Of the $34.6 million in capital expenditures related to facilities and related infrastructure, $0.4 million relates to fixed assets acquired through financing obligations. For fiscal 2016, we currently expect to invest between $225.0 million and $275.0 million in capital expenditures to support our future growth.

Financing Activities:

        Cash used in financing activities for fiscal 2015 totaled $971.9 million. In fiscal 2015, we used $1,033.3 million of cash to repurchase approximately 9.5 million of our common shares through repurchases on the open market and through a repurchase of shares from Lavazza. These repurchases were pursuant to repurchase programs under which our Board of Directors has authorized the repurchase of up to an aggregate of $3.5 billion of our common shares through various times from fiscal 2012 through fiscal 2015, at such times and prices as determined by the Company's management. In fiscal 2015, $330.0 million was drawn against our revolving credit facility, of which a portion was used to fund $158.7 million in repayments of our long-term debt, principally for our term loan A under our previous credit facility. We also paid dividends of $175.7 million. Cash flows from operating and financing activities included a $40.8 million tax benefit 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, 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.

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Long Term Debt

        On June 29, 2015, we entered into a new Credit Agreement, by and among the Company and Keurig Trading Sàrl, a wholly-owned subsidiary of the Company, as borrowers, Bank of America, N.A., as administrative agent, and the other lenders named therein (the "Credit Agreement") that provides for a $1,800,000,000 unsecured revolving credit facility (the "New Revolving Facility") comprised of a $1,300,000,000 U.S. revolving credit facility under which the Company may obtain extensions of credit, subject to the satisfaction of customary conditions, in U.S. Dollars (the "U.S. Revolver") and a $500,000,000 alternative currency facility under which the Company and Keurig Trading Sàrl, a wholly owned subsidiary of the Company, may obtain extensions of credit, subject to the satisfaction of customary conditions, in U.S. Dollars or in Canadian Dollars, Euros, Pounds Sterling, Yen, Swiss Franc and any other currency that is approved by the administrative agent and appropriate lenders or U.S. letter of credit issuer pursuant to the terms of the Credit Agreement (the "Alternative Currency Revolver"). The New Revolving Facility includes a $200,000,000 subfacility for the issuance of letters of credit, and a $50,000,000 sublimit for swing line loans restricted to borrowings in U.S. Dollars only.

        The Credit Agreement permits the Company to request increases to the New Revolving Facility, and/or the establishment of one or more new term loan commitments, in an aggregate amount not to exceed $750,000,000 (the "Incremental Credit Facility"). The lenders under the New Revolving Facility will not be under any obligation to provide any such increases or new term loan commitments, and the availability of such additional increases and/or establishment of new term loan commitments is subject to customary terms and conditions.

        At September 26, 2015, we had $330.0 million outstanding under the U.S. revolving credit facility and $5.4 million in letters of credit with $1,464.6 million available for borrowing. The Credit Agreement also provides for an increase option for an aggregate amount of up to $750.0 million.

        Our average effective interest rate at September 26, 2015 and September 27, 2014 was 1.3% and 3.7%, respectively, excluding amortization of deferred financing charges 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, ranging from 0.15% to 0.25% of the dollar amount of the unused portion of our revolving credit facilities.

        The Credit Agreement contains a financial covenant requiring that we maintain a minimum consolidated interest coverage ratio of 3.00:1.00. The Credit Agreement also contains a financial covenant requiring that the Company not exceed a maximum consolidated leverage ratio of 3.25:1.00, which maximum consolidated leverage ratio may be increased on a temporary basis to 3.50:1.00 in connection with certain material acquisitions and subject to certain conditions. At September 26, 2015, we were in compliance with these covenants. In addition, the Credit Agreement contains certain mandatory prepayment requirements and customary events on default.

Interest Rate Swaps

        We have historically been 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. There were no interest rate swaps in effect as of September 26, 2015. As a result of entering into the new Credit Agreement, in the third quarter of fiscal 2015, hedge accounting was discontinued for the interest rate swaps that were originally designated to hedge the forecasted future debt payments under the Former Credit Agreement, and the Company recognized a loss of $1.8 million in (loss) gain on financial instruments, net in the accompanying consolidated statements of operations representing the accumulated loss in OCI up to the date discontinuance. The refinancing also resulted in a net loss of approximately $2.1 million related to the write-off of deferred financing fees in connection with the Former Credit Agreement that was recognized as a loss on extinguishment of debt in the Consolidated Statement of Operations, and the recognition of approximately $4.1 million of additional deferred financing fees that were recorded on the Consolidated Balance Sheet and included in Other Long-Term Assets in the fourth quarter of fiscal 2015.

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        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. We designate the swap agreements as cash flow hedges and the changes in the fair value of these derivatives are classified in accumulated other comprehensive income (loss) (a component of equity). During fiscal years 2015, 2014 and 2013, we paid approximately $2.3 million, $3.2 million and $3.4 million, respectively, in additional interest expense pursuant to interest rate swap agreements.

Share Repurchases and Dividends

        On July 31, 2015, the Company's Board of Directors authorized the repurchase of up to an additional $1.0 billion of the Company's outstanding common stock over the next two years, at such times and prices as determined by the Company's management (the "July 2015 repurchase authorization"). At various times beginning in fiscal 2012, and including the July 2015 repurchase authorization, the Board of Directors has authorized the Company to repurchase a total of $3.5 billion of the Company's common stock (the "repurchase program").

        Under the repurchase program, the Company may purchase shares in the open market (including pursuant to pre-arranged stock trading plans in accordance with the guidelines specified in Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) or in privately negotiated transactions.

        Under our existing repurchase program, on February 28, 2014, we entered into an accelerated share repurchase ("ASR") agreement with a major financial institution ("Bank"). The ASR allowed 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 our common stock, in total, with an initial delivery to us of 4,340,508 shares of our common stock by the Bank. In the second quarter of fiscal 2015, the purchase period for the ASR ended and an additional 1,489,476 shares were delivered to us. In total, 5,829,984 shares were repurchased under the ASR at an average repurchase price of $120.07 per share. The shares were retired in the quarters they were delivered, and the up-front payment of $700 million was accounted for as a reduction to stockholders' equity in our Consolidated Balance Sheet in the second quarter of fiscal 2014.

        On March 3, 2015, we completed the repurchase of 5,231,991 shares of common stock from Lavazza for an aggregate purchase price of $623.6 million. The price per share was $119.18, which represented a 3.0% discount off the closing price of the Company's common stock on February 20, 2015, which was the business day immediately preceding the entry into the stock repurchase agreement with Lavazza.

        In addition, during fiscal 2015, we repurchased 4,307,488 shares of common stock on the open market and through pre-arranged purchases under Rule 10b5-1 at an average price per share of $95.13.

        As of September 26, 2015, $1,149.5 million of this aggregate authorized amount remained available for common stock repurchases. Additional repurchases will be made with cash on hand, cash from operations and funds available through our existing credit facility. See Note 15, Stockholders' Equity , of the Notes to the audited Consolidated Financial Statements included in this Annual Report.

        During fiscal 2015, we declared quarterly dividends of $0.2875 per common share, or $179.2 million in the aggregate. During the fiscal year ended September 26, 2015, we paid dividends of approximately $175.7 million.

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        On November 16, 2015, our Board of Directors declared the next quarterly cash dividend of $0.325 per common share, an increase of 13% over previous quarters, payable on February 16, 2016 to stockholders of record as of the close of business on January 15, 2016.

        We believe that our cash flows from operating activities, existing cash and our credit facilities will provide sufficient liquidity through the next 12 months to pay all liabilities in the normal course of business, fund anticipated capital expenditures, service debt requirements, fund any purchases of our common shares under the repurchase program, and pay dividends. We continually 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 future cash requirements related to our outstanding long-term debt, minimum lease payments and purchase commitments as of September 26, 2015 is as follows (in thousands):

 
  Long-Term
Debt
  Interest
Expense (1)
  Operating
Lease
Obligations
  Capital Lease
Obligations (2)
  Financing
Obligations (3)
  Purchase
Obligations (4)
  Total  

FY 2016

  $ 279   $ 4,419   $ 17,824   $ 4,453   $ 9,773   $ 625,222   $ 661,970  

FY 2017 - FY 2018

    596     8,805     25,593     7,899     19,631     748,678     811,202  

FY 2019 - FY 2020

    330,170     7,669     16,563     7,676     20,123     175,567     557,768  

Thereafter

    —             23,697     23,985     148,416     —       196,098  

Total

  $ 331,045   $ 20,893   $ 83,677   $ 44,013   $ 197,943   $ 1,549,467   $ 2,227,038  

(1)
Based on rates in effect at September 26, 2015.

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

(3)
Represents portion of the future minimum lease payments allocated to the building which are recognized as reductions to the financing obligation and interest expense.

(4)
Certain purchase obligations are determined based on a contractual percentage of forecasted volumes.

        In addition, we have $31.8 million in unrecognized tax benefits of which we are indemnified for $5.2 million expiring through December 2017. 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.

Factors Affecting Quarterly Performance

        Historically, the Company has experienced variations in sales and earnings from quarter to quarter due to the holiday season and a variety of other factors, including, but not limited to, the cost of green coffee, competitor initiatives, marketing programs, weather and special or unusual events. 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.

Critical Accounting Policies

        This discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which we prepare in accordance with GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period (see Note 2, Significant Accounting Policies, to our Consolidated Financial Statements included in this Annual Report on Form 10-K). Actual results could differ from those estimates. We believe the following accounting policies and estimates require us to make the most difficult judgments in the preparation of our consolidated financial statements and accordingly are critical.

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Acquisition

        The accounting for acquisitions requires extensive use of estimates and judgments to measure the fair value of the identifiable tangible and intangible assets acquired, and liabilities assumed. On December 18, 2014, we acquired all of the outstanding equity of Bevyz, a manufacturer and distributor of an all-in-one drink system, for total cash consideration of $180.7 million, net of cash acquired. The fair value for 100% of Bevyz identifiable assets less liabilities assumed was determined using an income approach. The excess of (i) the sum of the consideration for the shares purchased on December 18, 2014 and the acquisition date fair value of the Company's previously held equity interest in Bevyz, over (ii) 100% of the fair value of identifiable assets acquired less liabilities assumed, was recognized as goodwill. The acquisition date fair value of the Company's previously held equity interest in Bevyz was determined using a market approach, specifically prior transactions in shares of Bevyz. The determination of estimated fair values requires significant estimates and assumptions. We believe the estimated fair values assigned to the assets acquired and liabilities assumed were based on reasonable assumptions.

Goodwill and Intangibles

        Goodwill is tested for impairment annually at the end of our fiscal year or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Goodwill is assigned to reporting units for purposes of impairment testing. A reporting unit is the same as an operating segment or one level below an operating segment. We have defined three reporting units in our evaluation of goodwill for potential impairment: Domestic; Canada—Roasting and Retail; and Canada—Coffee Services, based on the availability of discrete financial information that is regularly reviewed by management. We may assess qualitative factors to determine if it is more likely than not (i.e., a likelihood of more than 50%) that the fair value of a reporting unit is less than its carrying amount, including goodwill. If we determine that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, no further testing is necessary. If, however, we determine that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, we perform the first step of a two-step goodwill impairment test. The assessment of qualitative factors is optional and at our discretion. We may bypass the qualitative assessment for any reporting unit in any period and perform the first step of the quantitative goodwill impairment test. We may resume performing the qualitative assessment in any subsequent period. The first step is a comparison of each reporting unit's fair value to its carrying value. We estimate fair value based on a weighting of the income approach, using discounted cash flows, and the market approach, using the guideline company method. The reporting unit's discounted cash flows require significant management judgment with respect to sales forecasts, gross margin percentages, SG&A expenses, capital expenditures and the selection and use of an appropriate discount rate. The projected sales, gross margin and SG&A expense rate assumptions and capital expenditures are based on our annual business plan or other forecasted results. Discount rates reflect market-based estimates of the risks associated with the projected cash flows directly resulting from the use of those assets in operations. The market approach uses observable market data such as comparable companies in similar lines of business that are publicly traded or which are part of a public or private transaction (to the extent available). The estimates of fair value of reporting units are based on the best information available as of the date of the assessment. If the carrying value of a reporting unit exceeds its estimated fair value in the first step, a second step is performed, which requires us to allocate the fair value of the reporting unit derived in the first step to the fair value of the reporting unit's net assets, with any fair value in excess of amounts allocated to such net assets representing the implied fair value of goodwill for that reporting unit. If the implied fair value of the goodwill is less than the book value, goodwill is impaired and is written down to the implied fair value amount.

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        Intangible assets that have finite lives are amortized over their estimated economic useful lives on a straight line basis. Intangible assets that have indefinite lives are not amortized and are tested for impairment annually or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Similar to the qualitative assessment for goodwill, we may assess qualitative factors to determine if it is more likely than not (i.e., a likelihood of more than 50%) that the fair value of the indefinite-lived intangible asset is less than its carrying amount. If we determine that it is not more likely than not that the fair value of the indefinite-lived intangible asset is less than its carrying amount, no further testing is necessary. If, however, we determine that it is more likely than not that the fair value of the indefinite-lived intangible asset is less than its carrying amount, we compare the fair value of the indefinite-lived asset with its carrying amount. If the carrying value of an individual indefinite-lived intangible asset exceeds its fair value, the individual indefinite-lived intangible asset is written down by an amount equal to such excess. The assessment of qualitative factors is optional and at our discretion. We may bypass the qualitative assessment for any indefinite-lived intangible asset in any period and resume performing the qualitative assessment in any subsequent period.

        During our annual 2015 indefinite-lived intangible asset impairment test, we noted a tradename within the Canada operating segment had excess fair value over its carrying values of less than 10%. While the trade name passed the 2015 impairment test, if our projections of future operating income were to decline, or if valuation factors outside of our control, such as discount rates, change unfavorably, the estimated fair value of the trade name could be adversely affected, leading to a potential impairment in a future period.

        Due to the inherent uncertainty involved in estimating sales growth and related expense growth, we believe that these are critical estimates for us. We have not made any material changes to the accounting methodology we use to assess the necessity of an impairment charge, either for goodwill or for both finite and indefinite-lived intangible assets. Based upon the results of our fiscal 2015 impairment tests (See Note 8, Goodwill and Intangible Assets, of the Notes to Consolidated Financial Statements included in this Annual Report), there were no impairment charges recognized for goodwill or intangible assets. Further, the fair values of all reporting units were in excess of the carrying values. As we continually reassess our fair value assumptions, including estimated future cash flows, changes in our estimates and assumptions could cause us to recognize future material charges.

Sales Return Allowance

        Sales of coffee brewers, pods and other coffee products are recognized net of any discounts, returns, allowances and sales incentives, including coupon redemptions and rebates. We estimate the allowance for returns using an average return rate based on historical experience and an evaluation of contractual rights or obligations.

Product Warranty

        We provide for the estimated cost of product warranties in cost of sales, at the time product revenue is recognized. Warranty costs are estimated primarily using historical warranty information in conjunction with current engineering assessments applied to our expected repair or replacement costs. The estimate for warranties requires assumptions relating to expected warranty claims which can be impacted significantly by quality issues. We currently believe that our warranty reserves are adequate; however, there can be no assurance that we will not experience some additional warranty expense in future periods related to previously sold brewers. A 10 percentage point increase in the fiscal 2015 overall warranty claims estimate would have resulted in additional expense, net of recoveries, of approximately $3.0 million in the accompanying fiscal 2015 Consolidated Statement of Operations.

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Inventories

        Inventories consist primarily of green and roasted coffee, including coffee in pods, purchased finished goods such as coffee brewers, and packaging materials. Inventories are stated at the lower of cost or market. Cost is being measured using an adjusted standard cost method which approximates FIFO (first-in first-out). We regularly review whether the net realizable value of our inventory is lower than its carrying value. Based upon the specific identification method, if the valuation shows that the net realizable value is lower than the carrying value, we take a charge to expense and reduce the carrying value of the inventory.

        We estimate any required write-downs for inventory obsolescence by examining our inventories on a quarterly basis to determine if there are indicators that the carrying values could exceed net realizable value. Indicators that could result in additional inventory write-downs include age of inventory, damaged inventory, slow moving products and products at the end of their life cycles. While significant judgment is involved in determining the net realizable value of inventory, we believe that inventory is appropriately stated at the lower of cost or market. In the fourth quarter of fiscal 2015 we extended the shelf life of certain of our owned and licensed K-Cup® pods which we expect will decrease our reserves for obsolescence of finished goods and have a positive impact on our gross margin.

Recent Accounting Pronouncements

        Information required by this Item is contained in Note 2, Significant Accounting Policies , of the Notes to the audited Consolidated Financial Statements included within Part II of this Annual Report on Form 10-K.

Off-Balance Sheet Arrangements

        The Company's off-balance sheet arrangements consist of certain letters of credit and are detailed in Note 11, Long-Term Debt, of the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K. We do not have, nor do we engage in, transactions with any special purpose entities.

Item 7A.    Quantitative and Qualitative Disclosures About Market Risk

        Market risks relating to our operations result primarily from changes in interest rates and the commodity "C" price of coffee (the price per pound quoted by the Intercontinental Exchange). To address these risks, we enter into hedging transactions as described below. We do not use financial instruments for trading purposes.

        For purposes of specific risk analysis, we use sensitivity analysis to determine the impacts that market risk exposures may have on our financial position or earnings.

Interest rate risks

        The table below provides information about our debt obligations, some of which are sensitive to changes in interest rates. The table presents principal cash flows and weighted average interest rates by fiscal year:

 
  2016   2017   2018   2019   2020   Thereafter   Total Debt
Outstanding and
average effective
interest rate at
September 26, 2015
 

Variable rate (in thousands)

  $ —     $ —     $ —     $ —     $ 330,000   $   $ 330,000  

Average interest rate (1)

    —   %   —   %   —   %   —   %   1.3 %   —   %   1.3 %

Fixed rate (in thousands)

  $ 279   $ 291   $ 305   $ 170         $   $ 1,045  

Average interest rate

    3.9 %   3.9 %   3.9 %   3.9 %         —   %   3.9 %

(1)
Based on variable rates in effect as of September 26, 2015.

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        At September 26, 2015, we had $330.0 million of outstanding debt obligations subject to variable interest rates. Should all our variable interest rates increase by 100 basis points, we would incur additional interest expense of $3.3 million annually. Additionally, should Canadian Bankers' Acceptance Rates increase by 100 basis points over US Libor rates, we would incur additional interest expense of $0.5 million annually, pursuant to the cross-currency swap agreement (see Foreign Currency Exchange Risk below). As discussed further under the heading Liquidity and Capital Resources the Company has historically entered into interest rate swap agreements. As of September 26, 2015, there were no interest rate swap agreements in effect.

Commodity price risks

        The "C" price of coffee is subject to substantial price fluctuations caused by multiple factors, including but not limited to weather and political and economic conditions in coffee-producing countries. Our gross profit margins can be significantly impacted by changes in the "C" price of coffee. We enter into fixed coffee purchase commitments in an attempt to secure an adequate supply of coffee. These agreements are tied to specific market prices (defined by both the origin of the coffee and the time of delivery) but we have significant flexibility in selecting the date of the market price to be used in each contract. At September 26, 2015, the Company had approximately $264.3 million in green coffee purchase commitments, of which approximately 90% had a fixed price. At September 27, 2014, the Company had approximately $407.7 million in green coffee purchase commitments, of which approximately 88% had a fixed price.

        Commodity price risks at September 26, 2015 are as follows (in thousands, except average "C" price):

Purchase commitments
  Total Cost (1)   Pounds   Average "C"
Price
 

Fixed (2)

  $ 215,104     110,956   $ 1.54  

Variable

  $ 27,015     15,894   $ 1.29  

  $ 242,119     126,850        

(1)
Total coffee costs typically include a premium or "differential" in addition to the "C" price.

(2)
Excludes $22.2 million in price-fixed coffee purchase commitments (9.9 million pounds) that are not determined by the "C" price.

        We regularly use commodity-based financial instruments to hedge price-to-be-established coffee purchase commitments with the objective of minimizing cost risk due to market fluctuations. These hedges generally qualify as cash flow hedges. Gains and losses are deferred in other comprehensive income until the hedged inventory sale is recognized in earnings, at which point gains and losses are recognized in cost of sales. At September 26, 2015, we did not hold any outstanding coffee futures contracts. At September 27, 2014, we held outstanding futures contracts covering 7.5 million pounds of coffee with a fair market value of $3.4 million, gross of tax. Purchase commitments hedged with financial instruments are classified as fixed in the table above.

        At September 26, 2015, we are exposed to approximately $27.0 million in unhedged green coffee purchase commitments that do not have a fixed price as compared to $47.2 million in unhedged green coffee purchase commitments that did not have a fixed price at September 27, 2014. A hypothetical 10% movement in the "C" price would increase or decrease our financial commitment for these purchase commitments outstanding at September 26, 2015 by approximately $2.7 million.

        We are also subject to commodity price risk as our manufacturing and transportation costs are affected by various market factors including the availability of supplies of particular forms of energy and energy prices, as well as price risk for utilities and various manufacturing inputs which are used in our manufacturing operations. Derivative instruments have not been used to manage these risks.

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Foreign currency exchange rate risk

        Presently, our foreign operations are primarily related to our Canada segment, which is subject to risks, including, but not limited to, unique economic conditions, changes in political climate, differing tax structures, other regulations and restrictions, and foreign exchange rate volatility. Accordingly, our future results could be materially adversely affected by changes in these or other factors. We also source our green coffee, certain production equipment, and components of our brewers and manufacturing of our brewers from countries outside the United States, which are subject to the same risks described for Canada above; however, most of our green coffee and brewer purchases are transacted in the United States dollar.

        The majority of the transactions conducted by our Canada segment are in the Canadian dollar. As a result, our revenues are adversely affected when the United States dollar strengthens against the Canadian dollar and are positively affected when the United States dollar weakens against the Canadian dollar. Conversely, our expenses are positively affected when the United States dollar strengthens against the Canadian dollar and adversely affected when the United States dollar weakens against the Canadian dollar.

        As described in Note 12, Derivative Financial Instruments , in the Notes to Consolidated Financial Statements contained in Item 8 of this Annual Report on Form 10-K, from time to time we engage in transactions involving various derivative instruments to mitigate our foreign currency rate exposures. More specifically, we hedge, on a net basis, the foreign currency exposure of a portion of our assets and liabilities that are denominated in Canadian dollars. These contracts are recorded at fair value and are not designated as hedging instruments for accounting purposes. As a result, the changes in fair value are recognized in the Gain (loss) on financial instruments, net line in the Consolidated Statements of Operations. We do not engage in speculative transactions, nor do we hold derivative instruments for trading purposes.

        At September 26, 2015 we had approximately 3 months remaining on a 5-year cross-currency swap of CDN $50.0 million that was not designated as a hedging instrument for accounting purposes, which largely offsets the financial impact of the re-measurement of an inter-company note receivable denominated in Canadian dollars for the same amount. Principal payments on the cross-currency swap are settled on an annual basis to match the repayments on the note receivable and the cross-currency swap is adjusted to fair value each period. Increases or decreases in the cross-currency swap are generally offset by corresponding decreases or increases in the U.S. dollar value of the Canadian dollar inter-company note.

        We occasionally use foreign currency forward contracts to hedge certain capital purchase liabilities for production equipment with the objective of minimizing cost risk due to market fluctuations. We designate these contracts as fair value hedges and measure the effectiveness of these derivative instruments at each balance sheet date. The changes in the fair value of these instruments along with the changes in the fair value of the hedged liabilities are recognized in net gains or losses on foreign currency on the consolidated statements of operations. We had no outstanding foreign currency forward contracts designated as fair value hedges at September 26, 2015. In addition, we use foreign currency forward contracts to hedge the purchase and payment of certain green coffee purchase commitments. We designate these contracts as cash flow hedges and measure the effectiveness at each balance sheet date. The changes in the fair value of these instruments are classified in accumulated other comprehensive income (loss). The gains or losses on these instruments are reclassified from other comprehensive income into earnings in the same period or periods during which the hedged transaction affects earnings. If it is determined that a derivative is not highly effective, the gain or loss is reclassified into earnings. We had outstanding foreign currency forward contracts designated as cash flow hedges with a notional value of $13.0 million at September 26, 2015.

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        Movements in foreign currency exchange rates exposes us to market risk resulting from the re-measurement of our net assets that are denominated in a currency different from the functional currency of the entity in which they are held. The market risk associated with the foreign currency exchange rate movements on foreign exchange contracts is expected to mitigate the market risk of the underlying obligation being hedged. Our net unhedged assets (liabilities) denominated in a currency other than the functional currency was approximately $3.7 million at September 26, 2015. Based on our net unhedged assets that are affected by movements in foreign currency exchange rates as of September 26, 2015, a hypothetical 10% movement in the foreign currency exchange rate would increase or decrease net assets (liabilities) by approximately $0.4 million with a corresponding charge to operations. In addition, at September 26, 2015, our net investment in our foreign subsidiaries with a functional currency different from our reporting currency was approximately $838.8 million. A hypothetical 10% movement in the foreign currency exchange rate would increase or decrease our net investment in our foreign subsidiaries by approximately $83.9 million with a corresponding charge to other comprehensive income.

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Item 8.    Financial Statements and Supplementary Data

 
  Page

Index to Consolidated Financial Statements

   

Report of Independent Registered Public Accounting Firm

  57

Consolidated Balance Sheets as of September 26, 2015 and September 27, 2014

  58

Consolidated Statements of Operations for each of the three years in the period ended September 26, 2015

  59

Consolidated Statements of Comprehensive Income for each of the three years in the period ended September 26, 2015

  60

Consolidated Statements of Changes in Stockholders' Equity for each of the three years in the period ended September 26, 2015

  61

Consolidated Statements of Cash Flows for each of the three years in the period ended September 26, 2015

  62

Notes to Consolidated Financial Statements

  64

Financial Statement Schedule—Schedule II—Valuation and Qualifying Accounts

  117

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Report of Independent Registered Public Accounting Firm

To the Board of Directors and the Stockholders
of Keurig Green Mountain, Inc.

        In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Keurig Green Mountain, Inc. and its subsidiaries at September 26, 2015 and September 27, 2014, and the results of their operations and their cash flows for each of the three years in the period ended September 26, 2015 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 26, 2015, based on criteria established in Internal Control—Integrated Framework 2013 issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements and financial statement schedules, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

        A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

        Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers LLP

Boston, MA
November 18, 2015

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Keurig Green Mountain, Inc.

Consolidated Balance Sheets
(Dollars in thousands)

 
  September 26,
2015
  September 27,
2014
 

Assets

             

Current assets:

             

Cash and cash equivalents

  $ 59,334   $ 761,214  

Restricted cash and cash equivalents

    30,460     378  

Short-term investment

    —       100,000  

Receivables, less uncollectible accounts and return allowances of $35,459 and $66,120 at September 26, 2015 and September 27, 2014, respectively

    517,936     621,451  

Inventories

    691,980     835,167  

Income taxes receivable

    51,786     —    

Other current assets

    95,526     69,272  

Deferred income taxes, net

    70,181     58,038  

Total current assets

    1,517,203     2,445,520  

Fixed assets, net

    1,293,563     1,171,425  

Intangibles, net

    423,887     365,444  

Goodwill

    747,406     755,895  

Deferred income taxes, net

    854     131  

Long-term restricted cash

    278     —    

Other long-term assets

    18,386     58,892  

Total assets

  $ 4,001,577   $ 4,797,307  

Liabilities and Stockholders' Equity

             

Current liabilities:

             

Current portion of long-term debt

  $ 279   $ 19,077  

Current portion of capital lease and financing obligations

    3,271     2,226  

Accounts payable

    298,609     411,107  

Accrued expenses

    226,519     305,677  

Income tax payable

    1,085     53,586  

Dividend payable

    44,048     40,580  

Deferred income taxes, net

    264     340  

Other current liabilities

    28,049     10,395  

Total current liabilities

    602,124     842,988  

Long-term debt, less current portion

    330,766     140,937  

Capital lease and financing obligations, less current portion

    117,187     116,240  

Deferred income taxes, net

    195,063     202,936  

Other long-term liabilities

    42,525     23,085  

Commitments and contingencies (See Notes 6 and 20)

             

Redeemable noncontrolling interests

    4,554     12,440  

Stockholders' equity:

             

Preferred stock, $0.10 par value: Authorized—1,000,000 shares; No shares issued or outstanding

    —       —    

Common stock, $0.10 par value: Authorized—500,000,000 shares; Issued and outstanding—153,209,256 and 162,318,246 shares at September 26, 2015 and September 27, 2014, respectively

    15,321     16,232  

Additional paid-in capital

    879,060     1,808,881  

Retained earnings

    2,014,279     1,687,619  

Accumulated other comprehensive loss

    (199,302 )   (54,051 )

Total stockholders' equity

  $ 2,709,358   $ 3,458,681  

Total liabilities and stockholders' equity

  $ 4,001,577   $ 4,797,307  

   

The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.

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Keurig Green Mountain, Inc.

Consolidated Statements of Operations
(Dollars in thousands except per share data)

 
  Fiscal years ended  
 
  September 26,
2015
  September 27,
2014
  September 28,
2013
 

Net sales

  $ 4,520,031   $ 4,707,680   $ 4,358,100  

Cost of sales

    2,912,507     2,891,820     2,738,714  

Gross profit

    1,607,524     1,815,860     1,619,386  

Selling and operating expenses

    539,259     561,573     560,430  

General and administrative expenses

    287,591     307,046     293,729  

Restructuring expenses

    15,250     —       —    

Operating income

    765,424     947,241     765,227  

Other income, net

    1,123     262     960  

Gain on financial instruments, net

    8,077     8,307     5,513  

Loss on foreign currency, net

    (22,166 )   (19,746 )   (12,649 )

Interest expense

    (1,882 )   (11,691 )   (18,177 )

Income before income taxes

    750,576     924,373     740,874  

Income tax expense

    (251,948 )   (326,959 )   (256,771 )

Net Income

  $ 498,628   $ 597,414   $ 484,103  

Net income attributable to noncontrolling interests

    353     896     871  

Net income attributable to Keurig

  $ 498,275   $ 596,518   $ 483,232  

Net income attributable to Keurig per common share:

                   

Basic

  $ 3.17   $ 3.80   $ 3.23  

Diluted

  $ 3.14   $ 3.74   $ 3.16  

Cash dividends declared per common share

  $ 1.15   $ 1.00   $ —    

Weighted-average common shares outstanding:

                   

Basic

    157,286,303     157,085,574     149,638,636  

Diluted

    158,898,678     159,568,342     152,801,493  

   

The accompanying Notes to Consolidated Financial Statements are an integral part of these financial
statements.

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Keurig Green Mountain, Inc.

Consolidated Statements of Comprehensive Income
(Dollars in thousands)

 
  Fiscal years ended  
 
  September 26, 2015   September 27, 2014   September 28, 2013  
 
  Pre-tax   Tax
(expense)
benefit
  After-tax   Pre-tax   Tax
(expense)
benefit
  After-tax   Pre-tax   Tax
(expense)
benefit
  After-tax  

Net income

              $ 498,628               $ 597,414               $ 484,103  

Other comprehensive income (loss):

                                                       

Cash flow hedges:

                                                       

Unrealized gains (losses) arising during the period

  $ 1,135   $ (342 ) $ 793   $ 20,641   $ (8,307 ) $ 12,334   $ (3,732 ) $ 1,489   $ (2,243 )

(Gains) losses reclassified to net income

    (14,894 )   5,994     (8,900 )   6,315     (2,556 )   3,759     1,484     (599 )   885  

Foreign currency translation adjustments

    (137,469 )   —       (137,469 )   (52,068 )   —       (52,068 )   (28,742 )   —       (28,742 )

Other comprehensive (loss) income

  $ (151,228 ) $ 5,652   $ (145,576 ) $ (25,112 ) $ (10,863 ) $ (35,975 ) $ (30,990 ) $ 890   $ (30,100 )

Total comprehensive income

                353,052                 561,439                 454,003  

Total comprehensive income (loss) attributable to noncontrolling interests

                13                 (203 )               156  

Total comprehensive income attributable to Keurig

              $ 353,039               $ 561,642               $ 453,847  

   

The accompanying Notes to Consolidated Financial Statements are an integral part of these financial
statements.

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Keurig Green Mountain, Inc.

Consolidated Statements of Changes in Stockholders' Equity
For the three fiscal years in the period ended September 26, 2015 (Dollars in thousands)

 
  Common stock    
   
  Accumulated
other
comprehensive
income (loss)
   
 
 
  Additional
paid-in
capital
  Retained
earnings
  Stockholders'
Equity
 
 
  Shares   Amount  

Balance at September 29, 2012

    152,680,855   $ 15,268   $ 1,464,560   $ 771,200   $ 10,200   $ 2,261,228  

Options exercised

    2,849,308     285     19,532     —       —       19,817  

Issuance of common stock under employee stock purchase plan

    343,678     34     9,926     —       —       9,960  

Restricted stock awards and units

    34,761     3     (3 )   —       —       —    

Repurchase of common stock

    (5,642,793 )   (564 )   (187,714 )   —       —       (188,278 )

Stock compensation expense

    —       —       26,081     —       —       26,081  

Tax benefit from equity-based compensation plans

    —       —       54,706     —       —       54,706  

Deferred compensation expense

    —       —       234     —       —       234  

Adjustment of redeemable noncontrolling interests to redemption value

    —       —       —       (2,025 )   —       (2,025 )

Other comprehensive loss, net of tax

    —       —       —       —       (29,385 )   (29,385 )

Net income

    —       —       —       483,232     —       483,232  

Balance at September 28, 2013

    150,265,809   $ 15,026   $ 1,387,322   $ 1,252,407   $ (19,185 ) $ 2,635,570  

Sale of common stock

    18,091,139     1,809     1,346,605     —       —       1,348,414  

Options exercised

    1,872,448     187     27,930     —       —       28,117  

Issuance of common stock under employee stock purchase plan

    170,531     18     12,546     —       —       12,564  

Restricted stock awards and units

    56,911     6     (6 )   —       —       —    

Repurchase of common stock

    (8,138,592 )   (814 )   (1,051,616 )   —       —       (1,052,430 )

Stock compensation expense

    —       —       30,673     —       —       30,673  

Tax benefit from equity-based compensation plans

    —       —       55,218     —       —       55,218  

Deferred compensation expense

    —       —       209     —       —       209  

Adjustment of redeemable noncontrolling interests to redemption value

    —       —       —       (2,368 )   —       (2,368 )

Cash dividends declared

    —       —       —       (158,938 )   —       (158,938 )

Other comprehensive loss, net of tax

    —       —       —       —       (34,866 )   (34,866 )

Net income

    —       —       —       596,518     —       596,518  

Balance at September 27, 2014

    162,318,246   $ 16,232   $ 1,808,881   $ 1,687,619   $ (54,051 ) $ 3,458,681  

Options exercised

    1,520,757     152     16,406     —       —       16,558  

Issuance of common stock under employee stock purchase plan

    183,546     18     12,696     —       —       12,714  

Restricted stock awards and units

    215,662     22     (22 )   —       —       —    

Repurchase of common stock

    (11,028,955 )   (1,103 )   (1,032,218 )   —       —       (1,033,321 )

Stock compensation expense

    —       —       31,934     —       —       31,934  

Tax benefit from equity-based compensation plans

    —       —       40,846     —       —       40,846  

Deferred compensation expense

    —       —       537     —       —       537  

Adjustment of redeemable noncontrolling interests to redemption value

    —       —       —       7,560     —       7,560  

Cash dividends declared

    —       —       —       (179,175 )   —       (179,175 )

Other comprehensive loss, net of tax

    —       —       —       —       (145,251 )   (145,251 )

Net income

    —       —       —     $ 498,275     —       498,275  

Balance at September 26, 2015

    153,209,256     15,321     879,060     2,014,279     (199,302 )   2,709,358  

   

The accompanying Notes to Consolidated Financial Statements are an integral part of these financial
statements.

61


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Keurig Green Mountain, Inc.

Consolidated Statements of Cash Flows
(Dollars in thousands)

 
  Fiscal years ended  
 
  September 26, 2015   September 27, 2014   September 28, 2013  

Cash flows from operating activities:

                   

Net income

  $ 498,628   $ 597,414   $ 484,103  

Adjustments to reconcile net income to net cash provided by operating activities:

                   

Depreciation and amortization of fixed assets            

    217,515     214,607     183,814  

Amortization of intangibles

    48,148     43,032     45,379  

Amortization of deferred financing fees                  

    4,606     5,651     7,125  

Loss on impairment of fixed assets

    16,256     —       —    

Unrealized (gain) loss on foreign currency, net            

    (2,862 )   15,196     9,159  

Provision for doubtful accounts

    5,452     1,782     689  

Provision for sales returns

    114,392     114,057     79,747  

Gain on derivatives, net

    (20,959 )   (1,582 )   (4,507 )

Excess tax benefits from equity-based compensation plans

    (40,843 )   (55,444 )   (54,699 )

Deferred income taxes

    (8,591 )   (52,708 )   (17,701 )

Deferred compensation and stock compensation            

    32,471     30,882     26,315  

Other

    10,563     4,224     759  

Changes in assets and liabilities, net of acquisitions

                   

Receivables

    (24,303 )   (274,884 )   (187,221 )

Inventories

    128,423     (166,473 )   87,677  

Income tax payable/receivable, net                        

    (64,337 )   120,553     46,290  

Other current assets

    (23,573 )   (838 )   (12,668 )

Other long-term assets, net

    2,369     3,162     3,915  

Accounts payable and accrued expenses                  

    (155,922 )   133,818     133,532  

Other current liabilities

    (1,191 )   (7,521 )   3,100  

Other long-term liabilities

    18,620     (5,495 )   1,161  

Net cash provided by operating activities                              

    754,862     719,433     835,969  

Cash flows from investing activities:

                   

Change in restricted cash

    (5,383 )   182     3,005  

Purchase of short-term investment

    —       (100,000 )   —    

Maturity of short-term investment

    100,000     —       —    

Acquisition, net of cash acquired

    (180,698 )   —       —    

Purchase of long-term investment

    (1,000 )   (35,905 )   —    

Proceeds from the sale of subsidiary, net of cash retained

    765     —       —    

Capital expenditures for fixed assets

    (411,099 )   (337,860 )   (232,780 )

Other investing activities

    (1,016 )   1,164     4,208