Just about every time, I examine financial reports issued by Green Mountain Coffee Roasters (NASDAQ: GMCR), I find new troubling accounting practices and financial disclosures. For example, in my last blog post I questioned whether the company correctly considered a certain accounting error as an "immaterial accounting error" when it was originally reported to investors. In this blog post, I will examine Green Mountain's segment reporting and non-GAAP financial presentations and raise questions whether they properly comply applicable accounting and SEC disclosure rules. In addition, I will discuss other new reporting errors disclosed by Green Mountain in its latest 10-Q report.
noted in his article that, "The accounting practices at Green Mountain Coffee Roasters (GMCR) are not baffling...they are downright ludicrous." I think Green Mountain's financial disclosures are both baffling and ludicrous.
On September 20, 2010, the SEC notified Green Mountain Coffee Roasters that it was conducting an informal inquiry. It requested information concerning “revenue recognition practices and the Company’s relationship with one of its fulfillment vendors.” Eight days later, on September 28, 2010, Green Mountain surprised investors by disclosing news of the SEC inquiry in an 8-K filing.
In that 8-K report, Green Mountain also disclosed that it discovered an "immaterial accounting error" involving its K-Cup margin percentages which resulted in a $7.6 million cumulative overstatement of pre-tax income in financial reports issued from 2007 to June 26, 2010. Since Green Mountain determined that its K-Cup margin error was immaterial under accounting rules, it disclosed that it was going to correct that error by making a one-time cumulative adjustment to earnings in the latest quarter.
On November 19, 2010, Green Mountain disclosed three new overstatements totaling $3.2 million pre-tax income and one new understatement of $0.7 million in pre-tax income. These errors plus the K-Cup margin error resulted in a total overstatement of $10.1 million in pre-tax income. This time, the company said it would restate its financial reports issued from 2007 to 2010 to correct its errors.
In my last blog post, I questioned whether Green Mountain correctly determined that its K-Cup margin error was an "immaterial accounting error" when it was initially disclosed on September 28, 2010. Under SEC Staff Accounting Bulletin No. 99, an individual accounting error that overstates profits and causes a company to beat analysts' consensus earnings expectations for any reporting period should be considered a material accounting error.
My analysis showed that the K-Cup margin error caused Green Mountain to overstate profits and beat analysts' consensus earnings expectations in the quarter ended March 27, 2010. Therefore, Green Mountain should have considered its K-Cup margin error as a material accounting error on September 28, 2010 and it should have immediately disclosed to investors that it was going to restate its financial reports from 2007 to 2010 to correct that error. Instead, Green Mountain waited until November 19, 2010 to inform investors that it was going to restate its financial reports.
Below, I will examine certain other financial disclosures by Green Mountain and raise questions whether the company properly complied with GAAP and other applicable SEC disclosure rules.
Restating segment numbers without disclosing it
I compared Green Mountain’s segment reporting in its Q1, Q2, and Q3 2010 10-Q reports with the previously year’s corresponding 10-Q reports and found certain inconsistencies in amounts reported for income before taxes, total assets, and depreciation and amortization. For example, in its Q3 2009 10-Q report, Green Mountain originally reported the following selected segment information for the 39 weeks ended June 27, 2009:
Corporate expenses also include interest expense, amortization of identifiable intangibles related to the acquisition of Keurig, as well as certain corporate legal expenses and compensation of the board of directors. All of the Company’s goodwill for the Keurig business unit and intangible assets related to the Keurig business unit are included in Corporate assets. [Emphasis added.]
Corporate expenses also include interest expense, certain corporate legal and acquisition-related expenses and compensation of the board of directors. In addition, fiscal 2009 corporate expenses are offset by $17,000,000 of proceeds received from a litigation settlement with Kraft. Corporate assets include cash and short-term investments.
Goodwill and intangibles related to the Frontier Natural Products Co-op, Tully’s, Timothy’s and Diedrich acquisitions are included in the SCBU reporting unit of the Company. Goodwill and intangibles related to Green Mountain Coffee Roasters, Inc.’s acquisition of Keurig are included in the Keurig reporting unit of the Company. [Emphasis added]
The re-allocation of goodwill and intangible assets seems to be the reason behind Green Mountain’s revision of its reported income before taxes for the thirty-nine weeks ended June 27, 2009 for its Keurig segment from $26.116 million in its Q3 2009 10-Q report to $29.725 million for the same period in its Q3 2010 10-Q report. In addition, the re-allocation of goodwill and intangible assets seems to explain why Keurig’s total assets as of June 27, 2009 was revised upward from $112.857 million in its Q3 2009 10-Q report to $240.859 million in its Q3 2010 10-Q report for the same June 27, 2009 date.
31. An enterprise shall provide an explanation of the measurements of segment profit or loss and segment assets for each reportable segment. At a minimum, an enterprise shall disclose the following…. d. The nature of any changes from prior periods in the measurement methods used to determine reported segment profit or loss and the effect, if any, of those changes on the measure of segment profit or loss.
Our incentive compensation plans are typically based on corporate and business unit performance, measured by a range of objective and subjective criteria, and not solely on individual performance.
Question: Is it appropriate to present a full non-GAAP income statement for purposes of reconciling non-GAAP measures to the most directly comparable GAAP measures?
Answer: Generally, no. Presenting a full non-GAAP income statement may attach undue prominence to the non-GAAP information. [Jan. 11, 2010].
The Company confirms that it will remove from future filings the presentation referred to above in this Comment 1 and replace it with a reconciliation table that is consistent with the guidance provided in the Answer to Question 102.10 of the Compliance & Disclosure Interpretations regarding Non-GAAP Financial Measures.
This time, NighHawk Radiology Holdings reconciled its non-GAAP adjusted net income to GAAP net income without providing a full non-GAAP income statement. Green Mountain should do the same.
Continuing financial reporting problems
In its Q1 2011 10-Q report, Green Mountain disclosed that it made errors in its previously audited fiscal year-end consolidated statement of cash flows:
Revision to Fiscal 2010 Year-End Consolidated Statement of Cash Flows
In preparing the consolidated financial statements for the thirteen weeks ended December 25, 2010, management identified that certain amounts previously disclosed within the Consolidated Statement of Cash Flows for the fiscal year ended September 25, 2010 required reclassification. These misstatements had no effect on the Company’s cash and cash equivalents. Specifically, the supplemental disclosure of fixed asset purchases included in accounts payable and not disbursed was overstated by approximately $8.2 million. This resulted in an $8.2 million understatement on the capital expenditures for fixed assets line and net cash used for investing activities category for fiscal 2010 and a corresponding understatement of the change in accounts payable line and an overstatement of net cash used in operating activities. The Company will make this immaterial correction when the 2010 financial statements are next issued.The company reported continuing material weaknesses in internal controls over financial reporting for its latest quarter:
Under the supervision of and with the participation of management, including the Company’s Chief Executive Officer and Chief Financial Officer, the Company conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended, as of December 25, 2010. Based on that evaluation and the material weaknesses referenced above, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were not effective as of December 25, 2010. [Emphasis added].Closing comment
10-Q report, Green Mountain disclosed that it was spent about $6 million on "legal and accounting expenses related to the SEC inquiry, the Company’s internal investigation and pending litigation" or approximately $46,000 per week during the quarter. According to Green Mountain's latest proxy statement, the combined annual base salaries for fiscal 2010 of its top five executive officers are just $2.01 million. In other words, in a single quarter Green Mountain spent three times the annual base salaries of its five top executive officers on legal and accounting issues arising from its restatements of financial reports.
The company's Audit Committee and Board of Directors recommended that "shareholders ratify the Audit Committee’s appointment of PricewaterhouseCoopers LLP" as its auditors. From 2007 to Q3 2010, every single financial report issued by Green Mountain which was audited or reviewed by PricewaterhouseCoopers needed to be restated due to material accounting errors. To date, no member of Green Mountain's board, none of its executive officers and certainly not its auditors have been held accountable for any errors in financial reporting.
Sam E. Antar
February 11, 2011: Dag Blog -"Crazy Eddie" Fraudster Sam Antar To Return To Crime - Thanks to Darrell Issa & Anti-Regulation Republicans by William K. Wolfrum
I am a convicted felon and a former CPA. As the criminal CFO of Crazy Eddie, I helped my cousin Eddie Antar and other members of his family mastermind one of the largest securities frauds uncovered during the 1980's. I committed my crimes in cold-blood for fun and profit, and simply because I could.
If it weren't for the heroic efforts of the FBI, SEC, Postal Inspector's Office, US Attorney's Office, and class action plaintiff's lawyers who investigated, prosecuted, and sued me, I would still be the criminal CFO of Crazy Eddie today.
There is a saying, "It takes one to know one." Today, I work very closely with the FBI, IRS, SEC, Justice Department, and other federal and state law enforcement agencies in training them to identify and catch white-collar criminals. Often, I refer cases to them. I teach about white-collar crime for professional organizations, businesses, and colleges and universities.
Recently, I exposed GAAP violations by Overstock.com which caused the company to restate its financial reports for the third time in three years. The SEC is now investigating Overstock.com and its CEO Patrick Byrne for securities law violations (Details here, here, and here).
I do not seek or want forgiveness for my vicious crimes from my victims. I plan on frying in hell with other white-collar criminals for a very long time.
I do not own any Green Mountain Coffee Roasters or Overstock.com securities long or short. My investigations of these companies are a freebie for securities regulators to get me into heaven, though I doubt I will ever get there. My past sins are unforgivable.