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Can Green Mountain Coffee Roasters explain those missing beans?

Green Mountain Coffee Roasters (NASDAQ: GMCR) can't seem to get its act together. It appears to have made a significant error in a recent revision of its segment numbers. Specifically, $15.2 million of purported revenue adjustments for a twenty-six period in 2011 are unaccounted for. Its revenue adjustments do not match revenue numbers disclosed in other financial reports.

Background

Green Mountain Coffee Roasters operates its business under three segments: Specialty Coffee business unit (“SCBU”), Keurig business unit (“KBU”) and a Canadian business unit (“CBU”). Starting in fiscal year 2012, GMCR moved its Timothy’s subsidiary out of the SCBU segment and into the CBU segment. At the same time it moved a portion of the At Home ("AH") single cup business from its KBU segment to its CBU segment.

In subsequent 10-Q reports issued during fiscal year 2012, Green Mountain Coffee revised its previous fiscal year 2011 segment numbers to show Timothy’s as part of the CBU segment. Likewise, it revised its fiscal year 2011 segment numbers to show the AH single cup business as part of the CBU segment. The company revised its previous fiscal year segment numbers to make them comparable on a year-to-year basis. Therefore, items such as revenues, expenses, income, assets and liabilities that had been previously included in the SCBU segment for Timothy’s and the KBU segment for the AH single cup business should have been included in the CBU segment numbers when it reported its revised fiscal year 2011 numbers.

Those revisions reveal discrepancies in Green Mountain Coffee’s segment numbers. Specifically, Timothy’s sales to unaffiliated customers (outside customers) that were subtracted from the SCBU segment and added to the CBU segment should have matched its contribution to consolidated revenues that were disclosed in previous financial reports. Those revenue numbers don’t match up. $15.2 million of those revenue adjustments are unaccounted for.

Green Mountain Coffee's revised segment numbers compared to originally reported segment numbers

In the 10-Q report (page 12) for the period ended March 24, 2012, Green Mountain Coffee described its revision of the previous fiscal year 2011 segment numbers:

Effective at the beginning of fiscal year 2012, the Company changed its organizational structure to align certain portions of its business by geography. Prior to fiscal 2012, sales and operations associated with the Timothy’s brand were included in the SCBU segment and a portion of the AH single cup business with retailers in Canada was included in the KBU segment. Under the new structure, Timothy’s and all of the AH single cup business with retailers in Canada are included in the CBU segment.

Furthermore, it disclosed:

The following tables summarize selected financial data for segment disclosures for the thirteen and twenty-six week periods ended March 24, 2012 and March 26, 2011. Selected financial data for segment disclosures for the thirteen and twenty-six weeks ended March 26, 2011 have been recast to reflect Timothy’s and the AH single cup business with retailers in Canada in the CBU segment. [Emphasis added.]

In that same March 24, 2012 10-Q report (page 14), Green Mountain Coffee presented the following revised segment revenue numbers for the previous fiscal year twenty-six weeks ended March 26, 2011. (Click on image to enlarge.)


Originally, Green Mountain Coffee had reported the following segment numbers in the previous fiscal year 2011 10-Q report (page 14) for the same twenty-six weeks ended March 26, 2011. (Click on image to enlarge.)


In the March 24, 2012 10-Q report, the SCBU segment’s sales to unaffiliated customers for the previous year's twenty-six week period ended March 26, 2011 was revised $42.424 million lower. The revision should have reflected the removal of Timothy’s sales to unaffiliated customers from the SCBU segment into the CBU segment. However, in the March 26, 2011 10-Q report (page 20) Green Mountain Coffee reported only $27.2 million of sales to unaffiliated customers for Timothy’s. (Click on image to enlarge.)


The "additional $27.2 million of revenue" were sales to unaffiliated customers because it "contributed" to consolidated revenues. Timothy's sold product to both unaffiliated customers (outside customers) and affiliated customers (units within Green Mountain Coffee). Its sales to unaffiliated customers are an addition to consolidated revenues. 

The company subtracted $42.4 million of Timothy’s sales to unaffiliated customers from the SCBU segment for the twenty-six weeks ended March 26, 2011 to reflect its removal from that segment even though it previously reported that such sales were only $27.2 million. How could Green Mountain Coffee remove $15.2 million in sales to unaffiliated customers from the SCBU segment that it did not have?

Back in September 2010, the Securities and Exchange Commission started a probe of Green Mountain Coffee’s accounting practices. Afterwards, the company reported that it found material weaknesses in internal controls over financial reporting. It restated its financial reports from fiscal year 2006 to fiscal year 2010 to correct certain violations of Generally Accepted Accounting Principles (GAAP) that helped it overstate its reported earnings in previous fiscal years. In its most recent 10-K report (page 57), the company maintained that it has "effective internal controls over financial reporting." I doubt it.

Written by,

Sam E. Antar

Recommended reading

NACD Directorship - Freudian Thinking to Prevent Fraud by NACD Editors

Financial Executives International - Sam E. Antar, Jonathan Marks, Address Anti-Fraud Collaboration by Edith Orenstein

The LongShortTrader: Green Mountain Coffee Roasters' Profits: Overstated or Misunderstood

The LongShortTrader: GMCR Refuses to Explain Exactly How the LongShortTrader's Report is Flawed

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 white-collar crime classes for various government entities, professional organizations, businesses, and colleges and universities. I do not want or seek forgiveness for my vicious crimes from my victims. My past sins are unforgivable.

I do not own any Green Mountain Coffee Roasters securities long or short. My ongoing investigation of Green Mountain Coffee Roasters documented in this blog is a freebie for the Securities and Exchange Commission. Hopefully, they will put in a good word for me on judgment day.

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