Wednesday, May 04, 2011

Green Mountain Coffee Roasters: Do they know how to count the beans?

Updated at 5:35 PM and 12:42 AM (5/5), please see bottom of post for additional issues

Does anyone at Green Mountain Coffee Roasters (NASDAQ: GMCR) know math or accounting? Seriously, does anyone in their accounting department know how to count the beans?

On September 28, 2010, Green Mountain Coffee disclosed that the SEC started an informal inquiry into its accounting practices eight days earlier. On that same day, the company reported an accounting error involving its K-Cup margin percentages. On November 19, 2010, Green Mountain Coffee disclosed four new accounting errors. On that date, the company said it would restate its financial reports issued from 2007 to the quarter ended 2010 to correct its errors.

Before the restatement of accounting errors, Green Mountain Coffee issued a 10-Q report for the quarter ended December 26, 2009 and disclosed the following financial results for Timothy’s:
For the thirteen-weeks ended December 26, 2009, Timothy’s contributed approximately $7,141,000 in revenue and $902,000 of income before taxes.
After the restatement of financial reports, Green Mountain Coffee issued a 10-Q report for the quarter ended December 25, 2010 and disclosed the following revised financial results for Timothy’s in 2009:
For the thirteen weeks ended December 26, 2009, the Timothy’s acquisition resulted in an additional $4.1 million of revenue and $0.0 million of income before income taxes.
[Emphasis added.]
Yesterday, Green Mountain Coffee issued its 10-Q report for the quarter ended March 26, 2011 and reported the following financial results for Timothy's from the previous fiscal year:
For the thirteen weeks ended March 27, 2010, the Timothy’s operations contributed an additional $13.0 million of revenue and $3.8 million of income before taxes. [Emphasis added.]
Maybe they need a calculator?
Therefore, for the twenty six weeks ended March 27, 2010, Timothy's operations should have contributed an additional $3.8 million of income before taxes ($0.0 million of income before income taxes for thirteen weeks ended December 26, 2009 plus $3.8 million of income before taxes for the thirteen weeks ended March 27, 2010). Right?

In that same 10-Q report for the quarter ended March 26, 2011, Green Mountain Coffee reported the following financial results for Timothy's for the previous twenty-six weeks ended March 27, 2010:
...Timothy’s operations contributed in an additional $17.2 million of revenue and $2.8 million of income before income taxes. [Emphasis added.]
Green Mountain Coffee's numbers for Timothy's don't add up. Timothy's Income for before taxes for the twenty-six weeks ended March 27, 2010 should be $3.8 million, not $2.8 million if you add up the numbers for each thirteen-week period. Did Green Mountain Coffee make a mathematical error or did the company find a new error in the quarter ended December 26, 2009 that was not found in its previous restatement of financial reports?

Green Mountain Coffee revises its reconciliation of its GAAP net income and non-GAAP net income to comply with Regulation G

At least Green Mountain Coffee corrected its presentation of net income to non-GAAP net income to comply with SEC Regulation G, as I recommended in a February 13, 2011 blog post.

In its 10-Q report for the quarter ended December 25, 2010, Green Mountain presented the following reconciliation of its GAAP net income and non-GAAP net income:


In my February 2011 blog post, I pointed out that:
According to Regulation G, Green Mountain's non-GAAP net income is required to be reconciled to its most directly comparable GAAP measure, which in this case is GAAP net income. Accordingly, Green Mountain showed how its non-GAAP net income did not include acquisition-related expenses, SEC inquiry expenses, and amortization of identifiable intangibles. However, according to SEC Regulation G Compliance & Disclosure Interpretations, Green Mountain cannot provide side-by-side reconciliations of GAAP and non-GAAP numbers in such a way that it presents a full non-GAAP income statement. See below:
Question 102.10
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].
In addition, I alerted the SEC about Green Mountain Coffee's violation of Regulation G.

In its 10-Q report for the quarter ended March 26, 2011, Green Mountain Coffee revised its reconciliation of GAAP net income and non-GAAP net income and no longer presented a full non-GAAP income statement. See below:


I've just started reviewing Green Mountain Coffee's latest 10-Q report and found even more troubling disclosures which I hope to detail soon.

Updated concerns

One issue that I am curious about is Green Mountain Coffee's costs related to the SEC inquiry and defending class-action lawsuits against the company. In the quarter ended December 26, 2010, it spent $5.989 million (pre-tax) in legal fees and other expenses and in the latest quarter ended March 26, 2011, it spent only $0.405 million (pre-tax). Under accrual basis accounting, expenses are recognized when incurred, not when paid. Below are my questions:

Question 1: Did Green Mountain Coffee pay sizable retainers to lawyers, accountants, and other experts in the quarter ended December 26, 2010 and expense the full amount in that quarter, rather than record them as a prepaid expense (asset) and expense those costs, as incurred, against income in future accounting periods?

Question 2: Did Green Mountain Coffee offset those costs with possible reimbursements from its D & O insurance carriers (assuming it has coverage)?

Question 3: If Green Mountain has insurance coverage, but did not accrue any possible insurance reimbursements, why didn't it disclose a gain contingency?

Written by:

Sam E. Antar

Disclosure

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 as an independent whistleblower. 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.

6 comments:

Jonathan Williams said...

Good finds Sam! I've been keeping a close eye on GMCR recently. A lot of their numbers (from a financial rather than accounting) perspective are very troubling.

Jeremy Lichtman said...

Never mind that they're trading at around 100 P/E (it was up to 150 recently).

I like their coffee, but wouldn't buy their stock.

Always True said...

they do not need to know how to count them, they do different business

Jonathan said...

Where did you find the restated quarterly report?
Before the restatement of accounting errors, Green Mountain Coffee issued a 10-Q report for the quarter ended December 26, 2009 and disclosed the following financial results for Timothy’s:

"For the thirteen-weeks ended December 26, 2009, Timothy’s contributed approximately $7,141,000 in revenue and $902,000 of income before taxes.

After the restatement of financial reports, Green Mountain Coffee issued a 10-Q report for the quarter ended December 25, 2010 and disclosed the following revised financial results for Timothy’s in 2009."

I was looking, but only saw a restatement for the period ending in December 26, 2009.

Thanks for analysis.

Jonathan said...

Where did you find the restated quarterly financial statements?

I looked on their investor page and the restated 10Q is only 10 pages with a note about their internal controls and officer declarations. Where can I find a copy of the restated financials?

Sam E. Antar said...

Jonathan:

On November 19, 2010, Green Mountain Coffee disclosed that it was restating its financial reports because of certain material accounting errors.

See 8-K report here:
http://www.sec.gov/Archives/edgar/data/909954/000119312510265256/dex991.htm

More details in 10-K report here:
http://www.sec.gov/Archives/edgar/data/909954/000119312510277481/d10k.htm

Regards,

Sam

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