Green Mountain Coffee Roasters

1. Green Mountain Coffee Roasters Matt Moore

2. Keurig Green Mountain As of March 12, 2014

3. Background • Started as small café in Vermont • Organic and Fair-Trade Coffee • Keurig Machines & K-Cups • Sell to wholesale Customers • Most of sales from K-Cups • Highest margins are on K-Cups

5. YTD Graph

6. Competitors

7. Mod 11 Recap • Accounting methods provide a tool for manipulation of reported information • Past accounting method choices may cause a reduction of comparability or create an appearance of comparability where it does not exist

8. Inventory Method • May not be comparable due to LIFO • If use LIFO, must provide LIFO adjustment • LIFO to LIFO “is not necessarily apples to apples” • Adjustment should be “net of tax” b/c if have FIFO, IRS would required tax on FIFO • FIFO values more meaningful when comparing to other companies and forecasting

9. Green Mountain Inventory “Adjusted standard cost method” roughly FIFO Regularly review inventory and reduce carrying value to realizable value Hard to apply textbook if company claims inventory is at FV Since roughly FIFO, no changes needed

10. SEC Investigation • Investigation tied to M. Block & Sons, consumer products distributor • The SEC has investigated companies associated with M. Block & Sons before • iGo Corp • Sunbeam Corp • In 2010, M. Block distributed inventory that equated to 43% of GMCR sales

11. Operating Leases • Operating leases are off-balance-sheet financing • Neither liability or asset recorded on B/S • Disclosure of expected future payments required • Use to estimate NEA and EPAT to account for leases as if they were capital leases

12. Steps to Capital Lease • Determine Discount Rate • If disclose capital lease, infer the implicit rate of return • Use rate corresponding to credit rating • Cost of debt capital (mod 6) • Compute PV of future lease payments • Adjust B/S to include PV from step 2 • Only affect NEA, as liability is financing option • Adjust I/S to include depreciation

13. Green Mountain Leases

14. 1. Find discount rate Can use IRR function in Excel or discount formula

15. 2. Compute FV of Future Payments

16. 3. Adjust B/S

17. 4. Adjust I/S 2012 Footnotes state required payment for 2013: 17,033 Interest rate 3.3% Interest Exp = $562 (17,033*.033) Depreciation Exp = $16,471 (17,033-562)

18. 4. Adjust I/S

19. Share Base Compensation • Differing use of stock options creates a lack of comparability between companies • If only paid employees by ESO, no wage expense • ASC 718-10-25-2 states ESO must be expense at FV at grant date • Doesn’t account for change between grant date and present

20. Steps to Book ESOs 1. Compute value of options exercisable at beginning of the year using beginning share price 2. Compute value of options exercisable at beginning of year using end of year prices 3. Estimate value of ESOs exercised during the year using average share price

21. Steps to Book ESOs 4. Estimate value of ESOs cancelled during year using avg. share price 5. Compute value of options exercisable at end of year using end of year price 6. Compute additional ESOs (5-2+3+4) 7. Adjust NFL, CSE, EPAT, FEAT Increase NFL by 5 Decrease CSE by 5 Decrease EPAT by 6 Increase FEAT by 2-1-3-4

22. Green Mountain ESOs

23. Green Mountain ESOs

24. Effect of ESOs

25. Company Issues Some information wasn’t on 2013 10-K and needed to use 2012 10-K Not sure exactly how GMCR accounts for inventory

26. Mod Issues From lecture: if LIFO, no change needed From reading: if FIFO, no change needed

27. Questions