2 PAGES Your answers should clearly reflect your critical thinking skills, and your understanding of the subject matter. Make necessary assumptions, wherever required Your answers should be original in writing Submit your answers in a word document with

20200415232237case x

 2 PAGES 

• Your answers should clearly reflect your critical thinking skills, and your understanding of the subject matter.
• Make necessary assumptions, wherever required
• Your answers should be original in writing
• Submit your answers in a word document with 1.5 line spacing, 12 font size.
• Attach the excel file if you have used any spreadsheet
• Plagiarism of any kind will make the submission invalid

All the Very best

— —— —

Use the case of Selling short: Green Mountain Coffee Roasters to answer the following questions.

1)Critically review the short sales activity from a market efficiency perspective.

2)As an Independent Financial Consultant, present a note on the Green Mountain’s

present and future business prospects.

3) The Bull and Bear cases presented for Green Mountain. Conduct a critical assessment of

these two views. Support your answer with necessary quantitative analysis.

4)Present a note on the financial misconduct at Green Mountain, if any and its impact on the valuations. What control measures you would suggest to prevent the financial misconduct?

5) What will be your recommendation to Dirks to take a short position in Green Mountain stock?

Attachments area
 

.

SELLING SHORT: GREEN MOUNTAIN COFFEE ROASTERS1

Marty Dirks wrote this case solely to provide material for class discussion. The author does not intend to illustrate either effective or ineffective handling of a managerial situation. The author may have disguised certain names and other identifying information to protect confidentiality.

This publication may not be transmitted, photocopied, digitized, or otherwise reproduced in any form or by any means without the permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western University, London, Ontario, Canada, N6G

0

N1; (t) 519.661.3208; (e) cases@ivey.ca;

www.iveycases.com.

Copyright © 20

12

, Richard Ivey School of Business Foundation Version: 2017-08-21

It was a cool day on October

18

, 2011, as institutional investor Marty Dirks looked out his office window at the Bay Bridge that led from San Francisco to Oakland. He wondered, “Do I feel lucky?”

The day before, Greenlight Capital (Greenlight), a highly-regarded long/short equity hedge fund, had presented a bear case (the analysis supporting a short position) for Green Mountain Coffee Roasters (NASDAQ: GMCR) at the Value Investing Congress in New York. It was an intriguing investment idea, but held huge risk.

Green Mountain Coffee Roasters (Green Mountain) was a volatile stock; in the past year its price had ranged from a 52-week low on December

16

, 2010 of $31.21 per share to a 52-week high on September 20, 2011 of $11

5.9

8 per share2 (see Exhibit 1). If Dirks had sold Green Mountain’s shares short on December 16, by September 20 he would have had a loss of

270

per cent in the position — in a market in which the Standard & Poor 500 had declined 2 per cent over the same period of time.

Could Dirks ever obtain enough conviction from his analysis to take on the investment risk inherent in Green Mountain?

COMPANY HISTORY

Green Mountain Coffee Roasters was founded in 1981 in rural Vermont, where it was still headquartered. Initially, it roasted and distributed coffee to restaurants and supermarkets throughout the region. For most of Green Mountain’s history, sales of wholesale coffee represented the majority of the business.

In 1998, Green Mountain started selling single-serve coffee in ‘K-Cups’ for Keurig Brewing System machines, primarily for the office market. In 2002, Keurig introduced K-Cup brewing machines designed

1 This case has been written on the basis of published sources only. Consequently, the interpretation and perspectives presented in this case are not necessarily those of Green Mountain Coffee Roasters or any of its employees.

The case is solely the work of Marty Dirks and was not prepared by, nor endorsed by, Greenlight Capital or its affiliates.

2 Thomson Reuters.

for the home market. At that time, Green Mountain invested $15 million in exchange for a 42 per cent ownership interest in Keurig. Four years later, Green Mountain bought the remaining ownership interest in Keurig for $

104

million. This acquisition made single-serve coffee sales the majority of Green Mountain’s business.3

With full ownership of Keurig, Green Mountain had evolved its business model to selling the K-Cup brewing machine for at (or near) cost and locking in a long-term sales annuity of single-use consumables at attractive profit margins. Green Mountain grew Keurig through direct sales and by licensing the K-Cup manufacturing technology to other coffee retailers such as Tully’s, Timothy’s, Diedrich and Van Houtte. Green Mountain also struck agreements to manufacture K-Cups for well-known coffee companies, such as Starbucks Corporation and Dunkin’ Donuts, providing the K-Cup with an even stronger market presence.

Patents

Green Mountain’s K-Cup design was patented; however, the patents were due to expire in September 2012. Accordingly, Green Mountain had stated it would roll out a new brewing technology to provide new patent protection in the future.

Green Mountain’s fiscal year 2009 Form 10-K filing stated:

The two principal patents associated with our current generation K-Cup portion packs will expire in 2012, and we have pending patent applications associated with this technology which, if ultimately issued as patents, would have expiration dates extending to 2023.

Furthermore, during a conference call with investors in July 2011,4 Green Mountain’s chief executive officer (CEO) explained:

With respect to our patents and intellectual property, we have a broad portfolio of patents on portion packs, on brewing machines and on the system of both portion packs and brewing machines; and certainly to the extent that any other product might infringe on our intellectual property, we take that very seriously and we would, in fact, rigorously defend our intellectual property.

Financials

From 1991 to 2000, revenues grew at a 25 per cent compound annual growth rate (see Exhibit 2). From 2000 to 2005, revenue growth slowed to

14

per cent per year. From 2006 to 2010, revenues grew

57

per cent per year (see Exhibit 3).5 Approximately 96 per cent of Keurig brewing machines shipped in fiscal year 2010 were sold to a television-based shopping outlet, the At Home channel. In total, Green Mountain had sold over 13 million single-serve brewing machines and over 9 billion K-Cups.6

3 Green Mountain 10-K for FY 2010;

http://investor.gmcr.com/background.cfm

; Green Mountain 10-K for FY 1997; Green Mountain 10-K for FY 2006; Green Mountain 8-K filed on May 22, 2006; Green Mountain 10-K for FY 2002.

4 Green Mountain’s CEO Discusses Q3 2011 Results, Earnings Call Transcript,

http://seekingalpha.com/article/282507-

green-mountain-s-ceo-discusses-q3-2011-results-earnings-call-transcript.

5 CapitalIQ.

6 Green Mountain 10-K for FY 2010.

(
Page

18

)

According to the Wall Street consensus assumptions, Green Mountain’s return on invested capital was approximately 16 per cent (see Exhibit 4).

Consumable Attachment Rate

Analysts following Green Mountain developed a methodology for tracking and forecasting sales of K- Cups. They calculated a metric referred to as the attachment rate — the average number of K-Cups sold per day for the quarter, divided by the number of brewing machines in the installed base. Analysts assumed the installed base consisted of all brewing machines sold in the prior 36 months.

Until the June 2011 quarter, the attachment rate had declined an average of 13 per cent from the same quarter in the prior year (see Exhibit 5). Using the assumption that the attachment rate was therefore declining at a rate of 13 per cent from the same quarter in the prior year, a reasonably predictive model was developed to forecast the next quarter’s attachment rate (see Exhibit 6). However, in the June quarter the attachment rate was unusually high. Management did not offer any clear explanations for this increase, attributing the surprisingly strong June quarter sales to the cumulative effects of multiple factors.

Valuation Metrics

As revenue growth increased, valuation multiples had increased substantially over the past five years (see Exhibit 7). Enterprise Value was $14.9 billion (see Exhibit 8). Based on Green Mountain’s current stock prices, up-to-date Wall Street estimates were calculated for Green Mountain’s revenues, earnings before interest and taxes (EBIT) and earnings per share (EPS); retail distribution trends were similarly assessed (see Exhibits 9 and 10).

THE BULL CASE

Bullish investors viewed Green Mountain as a high-growth business in its early stages. In an investor conference presentation on August 10, 2011, Green Mountain pointed to the 90 million households that owned a coffee-brewing machine as the company’s potential market and, with an installed base of 7 to 9 million brewing machines, noted that Green Mountain had only penetrated eight to 10 per cent of the market.7

Most analysts were more conservative and focused on the 64 million households that drank more than two cups of coffee each day. The bullish investors believed Green Mountain could capture one-third of that market, attaining an installed base of 21 million brewing machines. As of May 2011, Green Mountain’s installed base was

7.5

million machines, suggesting that the installed base could triple from that level.8

Bullish investors cited a number of arguments to support their ownership decision. Firstly, Green Mountain was capacity-constrained and had been unable to meet demand. On the first-quarter 2011 earnings call held on February 2, 2011, Larry Blanford, Green Mountain’s CEO, stated: “We are definitely being stretched . . . demand is definitely stretching our ability to supply. And we have not quite

7 Green Mountain presentation given at conference on August 10, 2011.

8 SunTrust Robinson Humphrey research note published May 6, 2011.

caught up with that demand curve yet.”9 The company had stated that its sales were constrained by inadequate production capacity; therefore, as additional capacity was added, sales should grow quickly and Green Mountain’s profit margins would expand as additional infrastructure investments were made in 2012.

Similarly, distribution was likely to expand substantially from its current level. Retailers would commit additional shelf space to brewing machines and K-Cups going forward. Additional sales would also result from adding recognized brands like Starbucks and Dunkin’ Donuts to the Keurig system. Availability of these brands in the Keurig system would reduce the risk of competition.10 Growth of the Keurig installed base should continue as well. The K-Cup had become the standard format for single-serve coffee and the only prominent coffee brands that Green Mountain did not have in its portfolio were Maxwell House and Peet’s.

Furthermore, while coffee made with K-Cups was more expensive than coffee made with traditional brewing methods, it was still far less expensive than coffee purchased at certain retailers, such as Starbucks: the cost of coffee brewed from K-Cups was approximately one-third of the cost of coffee purchased at Starbucks. The K-Cup brewing system was a premium-priced, high-end system. Private- label coffee sales represented approximately 10 per cent of all coffee sold at retail and, since private-label coffee was a low-end, unbranded product, it was expected to penetrate only a small part of the K-Cup market.11

Finally, Green Mountain was well protected against competition. In March 2011, Green Mountain’s chief financial officer (CFO) stated: “We are a technology company with a host of patents.”12 In August 2011, Green Mountain’s CEO said, “I would define our company today as really a single-serve beverage company that is sitting on top of this magnificent technology — call it disruptive technology — platform.”13 Management had further described Green Mountain’s position in the marketplace as “the iPod of coffee.”14 Even after Green Mountain’s patents expired in 2012, there would be substantial barriers to entry by competitors. The capital investment required to produce K-Cups on a large scale was significant and new entrants would likely have a difficult time obtaining retail shelf space.

Some prominent investors had great faith in Green Mountain’s business model. In June 2011, referring to Green Mountain’s many relationships with branded coffee manufacturers, prominent investor, Jim Cramer, described Green Mountain as an “exchange-traded fund (ETF) on the rapid-growing single-serve market.”15 An optimistic estimate for long-term earnings per share (EPS) potential was calculated to be

$8.0

0 to $1

0.0

0 per share (see Exhibit 11).

9 Green Mountain’s CEO Discusses Q1 2012 Results, Earnings Call Transcript,

http://seekingalpha.com/article/333992-

green-mountain-coffee-s-ceo-discusses-f1q12-results-earnings-call-transcript.

10 Janney Capital Markets research notes and SunTrust Robinson Humphrey research notes.

11 SunTrust Robinson Humphrey research note published May 6, 2011.

12 Fran Rathke, GMCR CFO – conference on March 15, 2011.

13 Larry Blanford, GMCR CEO – conference on August 10, 2011.

14 Greenlight, “Value Investing Congress,” Wall Street Journal, October 17, 2011,

http://online.wsj.com/public/resources/documents/EinhornGMCRpresentation_Oct2011_VIC

, accessed June 28, 2012, Greenlight conversation with GMCR management.

15 Mad Money Recap, June 29, 2011,

www.madmoneyrecap.com/madmoney_nightlyrecap_110629_3.htm.

THE BEAR CASE

Greenlight’s estimate for Green Mountain’s long-term earnings power differed substantially from the bull case. Greenlight estimated long-term EPS potential at

$3.47

per share (see Exhibit 12), in contrast to the bull’s estimate of $

8.8

5 per share, based on several factors, as summarized below.

The High Cost of the K-Cup Brewing System Limits the Market Opportunity

Coffee prepared using a K-Cup system cost three to 10 times as much as coffee made with a conventional drip brewer (see Exhibit 13). The Keurig brewing machines were also highly priced (three times the price of similar coffee-brewing machines) and the ongoing cost of coffee in a K-Cup format was at least three times the cost of regular coffee. K-Cups were a luxury item, which limited the market for the product to the high end of the market, as opposed to the entire market of coffee drinkers.

While Greenlight had some qualitative arguments that might have led to a lower addressable market estimate, the company chose to be conservative in its assessment of the overall market. Like the bullish analysts, Greenlight estimated that only one-third of the households that drank more than two cups of coffee per day were candidates for the Keurig brewing system and that the total addressable market was 21 million units.

As of June 2011, the installed base of Keurig brewers was more than 10 million, as per Greenlight’s calculations. With a total addressable market of 21 million units, at the end of the June quarter the Keurig system had penetrated nearly 50 per cent of the total addressable market. Greenlight argued that with 50 per cent of the market penetrated, revenue growth was likely to soon slow significantly.

Greenlight’s lower earnings estimate was based on several different assumptions:

Average Daily K-Cups per Installed Brewing Machine

The bull model used a consumption forecast of two average daily K-Cups per brewing machine. Greenlight assumed 1.2 average daily K-Cups per machine in its forecast based on the trend of the calculated actual K-Cup attachment rate (see Exhibit 6).

Private Label Market Share

Because of the high cost of preparing coffee in the K-Cup format, Greenlight estimated that 20 per cent of the K-Cup market would eventually be private-label coffee as opposed to coffee produced by major brands like Starbucks or Dunkin’ Donuts. This assumption reduced Green Mountain’s addressable market opportunity by 20 per cent.

Sturm Foods, Incorporated (Sturm), a major manufacturer, was already producing filterless K-Cups and planned to enter the market to compete with a filtered K-Cup as soon as Green Mountain’s patents expired. Sturm could modify its current production facility with minimal capital investment and believed they could gain substantial penetration into the private label segment of the K-Cup market because the K- Cups were so highly priced relative to their cost to manufacture. An industry expert noted that “Sturm feels that the potential penetration level of single-serve coffee is so much greater than it is for the standard

business because the price differentials are going to be huge. I would say that a 20 per cent penetration level would not be a bad number.”16

Major retailers, including The Kroger Co., Safeway Inc., H-E-B, Wegmans Food Markets, Inc. and Costco Wholesale Corporation, told Greenlight that they would be interested in buying a private-label product as soon as a private-label manufacturer could produce a K-Cup-compatible product with a filter.

Profit per K-Cup

Greenlight estimated that Green Mountain’s profit per K-Cup was

$0.12

. This estimate was based on the bull’s estimate of profit per K-Cup (

$0.15

for each K-Cups made by Green Mountain — assumed to be 70 per cent of long-term sales) and Greenlight’s estimate of

$0.0

6 of profit per K-Cup for non-Green Mountain K-Cups (30 per cent of sales). Revenue for production of non-Green Mountain K-Cups was essentially a manufacturing fee paid by Starbucks and other coffee retailers to Green Mountain to package their coffee into K-Cups. Greenlight presented a compelling, detailed analysis outlining their calculation of the $0.06 of profit per K-Cup for non-Green Mountain K-Cups. Non-Green Mountain K-Cups were growing faster than Green Mountain’s K-Cups, resulting in a declining trend in profit per K-Cup.

Patent Expirations

With Green Mountain’s patents set to expire in September 2012, competitors would soon be able to make and sell K-Cups for use in the 10-million-unit installed base of Keurig’s machines. The company’s business model of selling a brewing machine at cost to create a high margin stream of future K-Cup revenue would therefore be broken and monopoly profits no longer available. Competitors would be able to advertise their K-Cups as compatible with the Keurig brewing system; most of Green Mountain’s contracts to produce K-Cups for other coffee brands were non-exclusive.17

Bullwhip Effect

As new retail outlets were added, the sales of products to fill retailers’ shelves and distribution centres were included in Green Mountain’s revenue. In other words, because new sales outlets had been added, revenue recognized by Green Mountain was higher than end-consumer purchases — a phenomenon known as the “bullwhip effect.” Sales recognized by Green Mountain would continue to be greater than end-customer purchases as more and more new retail and distribution sites were added. As fewer retail sites were added, Green Mountain’s growth in recognized revenue would eventually fall below the end- customer growth rate.

For example, if Green Mountain had steady sales of $10 million per year and added an additional $1 million-per-year customer at the beginning of the first quarter in the second year, its revenue growth profile would change differently than one may expect (see Exhibit 14). While one might expect revenue growth to be 10 per cent for four consecutive quarters, it must be noted that revenue growth would be inflated by inventory stocking in the first quarter when the new customer is added. Similarly, revenue growth in the first quarter of the following year would be understated because of the comparison to the

16 Greenlight, “Value Investing Congress,” Page 63, Greenlight interview with private label food & beverage industry expert.

17 Greenlight, “Value Investing Congress,” Page 48, Greenlight interview with professor of law.

inflated revenue in the prior year. Many investors would sell Green Mountain stock if it missed revenue growth expectations, even by a small amount.

POOR QUALITY OF REPORTED EARNINGS

Accounting for Acquisitions

Green Mountain has made several acquisitions in recent years. The valuation multiples and allocation of the purchase price to goodwill and intangibles is shown in Exhibit 15. Note that the allocation of the purchase price to goodwill and intangibles is high.

High Capital Expenditures

Capital expenditures were growing faster than the business at a time when Green Mountain should be achieving greater economies of scale and capital should be deployed more efficiently (see Exhibit 16).

Insider Sales

A 7,503,883-share offering was completed in May 2011, at $71 per share, with 403,883 shares being sold by directors and officers. Sales by insiders in this offering totaled $29 million.

On August 4, 2011, 144 filings were made with the U.S. Securities and Exchange Commission (SEC) for stock sales, as shown below:

Robert P. Stiller, Green Mountain’s Chairman – $221,920,000 Stiller Family Foundation – $665,760

Green Mountain Coffee Roasters Foundation – $4,161,000

In 2011, there was $172 million in insider sales through September. Shares initially valued at $1.3 billion had been sold by Green Mountain insiders since August 2009.

Reports of Possible Financial Misconduct from Ex-employee Interviews18

It was difficult to understand how Green Mountain sold the extra $100 million of K-Cups in the June 2011 quarter, but Greenlight’s research provided some possible insight. Greenlight interviewed ex- employees of Green Mountain, yielding some troubling information:

Revenue Recognition Issues

In the June quarter of 2011, Green Mountain sold 1.3 million brewing machines, which exceeded market expectations by about 300,000 units. There are signs that business was not as strong as the report would indicate.

18 Greenlight, “Value Investing Congress,” p. 94,

Excerpts from the ex-employee interviews have been reproduced with permission from Greenlight Capital.

During a class action lawsuit filed earlier in 2011, a confidential witness alleged that:

Green Mountain improperly recognized revenue on 150 truckloads of product shipped to the company’s primary distributor, MBlock, during the quarter that ended December 26, 2009. Green Mountain employees, including the company’s global transportation manager, were unable to locate the requisite paperwork, including purchase orders and product shipment authorizations, traditionally used by Green Mountain to validate the sale. . . . Because there was no order for these products, no payment was ever made on the shipment. In addition, the order was not listed on the company’s production forecast schedule; however, employees . . . not only saw the trucks go out, but visited MBlock and saw its warehouses filled to the rafters with K-Cups. The

estimated value of the revenue recognized on the improperly recorded transaction was between

$7.5 and $15 million.19

Weak Financial Controls

Both Green Mountain and MBlock used sub-standard information technology (IT) systems. Important functions, including inventory management, were performed in Excel spreadsheets, which were easy to change, provided non-standardized analysis and were prone to material error. Suggestions to improve operations through the use of new technologies were allegedly met with resistance in both organizations.20

In addition, Green Mountain’s accounting department supposedly used many temporary workers and made extensive use of college interns instead of hiring full-time accountants. Some former Green Mountain workers believed that they were fired for asking too many questions about the company’s practices.21

Unusual Inventory Handling and Accounting

One ex-employee stated, “We would do more transferring of inventory than actual shipping. Keurig

would ship stuff to themselves — I mean truckloads of stuff . . . to themselves.” 22A truck driver for Kenco coffee, one of Green Mountain’s two U.S. distributors reported delivering merchandise to Kenco only to retrieve it later on and deliver it to a location just 10 bay doors down at the same warehouse.23

There were irregularities during external inventory audits at MBlock: A former MBlock employee noted prior to the inventory audit, “We would remove product and pre-load trailer trucks to ship to retailers because we did not have room on the floor. Then we would load more product on trailer trucks to nowhere to move it off the floor.”

24

The warehouse was partially cleared prior to an audit, leaving a skeleton inventory of approximately 50 per cent. Inventory was loaded onto trucks where it sat in the docks and was never counted. Sometimes, after the audit, the product would simply be moved back into a warehouse. Immediately prior to an audit, 500,000 brewing machines were inventoried and processed as an order for QVC. The machines were never shipped and after the audit the inventory was restocked.25

19 Greenlight, “Value Investing Congress,” p. 91, Greenlight interviews with Former Green Mountain/MBlock workers.

20 Greenlight, “Value Investing Congress,” p. 93.

21 Ibid.

22 Greenlight, “Value Investing Congress,” p. 94. 23 Greenlight, “Value Investing Congress,” p. 95. 24 Greenlight, “Value Investing Congress,” p. 97. 25 Ibid.

Expired Inventory

Interviews with ex-employees found evidence that Green Mountain’s inventory contained a large amount of expired product. Channel checks also identified expired product and significant amounts of retail product with short shelf life.

An ex-employee noted: “The plant managers just kept saying that excessive space was taken up by the inordinate amount of expired coffee.” One ex-employee estimated that, on average, at least one-third of the space in Green Mountain’s warehouses was occupied by expired coffee.26

Short interest

Short interest for Green Mountain is shown in Exhibit 17.

26 Greenlight, “Value Investing Congress,” p. 96.

Exhibit 1

(
Sources: Thomson Reuters; GMCR FY2010 10-K, GMCR 10-Q for 3Q 2011.
Exhibit 2
INCOME STATEMENT FOR GREEN MOUNTAIN COFFEE ROASTERS
Fiscal Year Ending September
)STOCK PRICE HISTORY FOR GREEN MOUNTAIN COFFEE ROASTERS (GMCR)

millions $

2008

2009

2010

2011E

2012E

Total Revenue

492.5

786.1

1,35

6.8

2,701.3

4,3

45

.8

Growth yr/yr

46.5%

59.6%

72.6%

99.1%

60.9%

COGS

318.5

540.7

93

1.0

1780.2

2824.8

Gross Profit

17

4.0

245.4

425.8

921.1

1521.0

Gross Margin %

3

5.3

%

31.2%

31.4%

34.1%

3

5.0

%

Total SG&A

129.4

16

9.0

253.2

504.0

835.4

Operating Income

4

4.7

76.4

172.6

417.1

685.6

Operating margin %

9.1%

9.7%

12.7%

15.4%

15.8%

Net Interst and Other

(5.9)

(5.4)

(5.6)

(30.3)

(31.9)

Pre-Tax Profit

38.7

71.0

167.0

386.8

653.7

Income Taxes

15.0

27.1

61.7

143.7

24

2.0

Non-GAAP Net Income

23.7

43.9

105.3

243.1

4

11.7

Non-GAAP EPS

$0.21

$0.36

$0.76

$1.61

$2.5

9

Source: Historical data as per GMCR SEC filings and earnings reports; forward estimates represent consensus estimates as per Bloomberg as of October 13, 2011. Note that Non-GAAP results exclude acquisition-related transaction expenses, legal and accounting expenses related to the SEC inquiry, foreign exchange impact and non-cash items such as losses incurred on the extinguishment of debt and amortization of identifiable intangibles (GMCR began excluding amortization of intangibles from Non-GAAP earnings in FY 2010).

Exhibit 3

CASH FLOW FOR GREEN MOUNTAIN COFFEE ROASTERS

millions $

Non-GAAP Net Income

($101.9)

FY 2006	FY 2007	FY 2008	FY 2009					FY 2010	YTD 2011
Revenue	$492.5	$786.1	$1,256.8	$2,701 .3
$23.7	$43.9	$105.3	$243.1
Cash Flow from Operations	$12.8	$2 9.8	$1.9	$38.5	-$ 10.5	$174.7
Capital Expenditures	-1 3.6	-21.8	-48.7	-48.3	-118	-175.5
Acquisitions	-101.1	0	$0.0	-41.4	-459.5	-907.8
Free Cash Flow		($101.9)	$8.0	($46.8)	($51.2)	($588.0)	($90 8.6 )
Cumulative Free Cash Flow	($93.9)	($140.7)	($191.9)	($77 9.9 )	($1,688.5)

Note: YTD 2011 represents 39 weeks ended June 25, 2011.

Source: GMCR 10-K’s for 2010, 2009, 2008. GMCR 10-Q for Q3 2011.

Exhibit 4

RETURN ON INVESTED CAPITAL

2013 Bull Case EPS (1)	$4.00
	Shares Outstanding			160
Implied Net Income	640
Estimated net Working capital (2)	1,120.0
Acquisitions (3)	1,409.1
Net Fixed Assets as of Q3 2011	499.1
CapEx in Q4 2011 (4)	162.0
CapEx in FY 2012 (4)	740.0
Total Invested Capital	3,930.2
Return on Invested Capital	16. 3%

1. SunTrust Robinson Humphrey research note published September 13, 2011; Janney Capital Markets research note published September 22, 2011.

2. Assumes net working capital required is equal to

2

0%

of FY2013 revenue (using consensus estimates from Bloomberg as of October 13, 2011).

3. Represents purchase price of Tully’s, Timothy’s, Diedrich and Van Houtte in aggregate.

4. Assumes the mid-point of GMCR capital expenditure guidance.

Exhibit 5

YEAR-OVER-YEAR CHANGE IN ATTACHMENT RATE

Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Q1 2009 Q2 2009 Q3 2009 Q4 2009 Q1 2010 Q2 2010 Q3 2010 Q4 2010 Q1 2011 Q2 2011 Q3 2011

-15% -13% -15% -12% -15% -18% -14% -7% -12% -13% 11%

Average Year-over-Year Change in Attachment Rate excluding June 2011 = -13%

Source: Greenlight estimates. The number of brewers in the installed base is determined by adding up all the brewers sold in the prior 36 months. The attachment rate is calculated by dividing the average number of K-Cups sold per day in the quarter by the number of brewers in the installed base. The year-over-year change in attachment rate is calculated by comparing the current quarter attachment rate to the same quarter in the prior year.

Exhibit 6

K-CUP FORECAST MODEL

Dec

FY 2010

FY 2010

FY 2010

FY 2010

1.33

Until June 2011, K-Cup sales have been predictable
	Dec	Mar	Jun	Sep	Mar Jun
Units in millions	FY 2011	FY 2011 FY 2011
Estimated Installed Brewer Base			4.7		5.3	5.9	6.8	8.6	9.6 10.6
Predicted Attachment Rate	1.54	1.58	1.27	1.34	1.31	1.30 1.10
Predicted K-Cup Units	666	764	690	775	1,034	1,142 1,058
Actual Attachment Rate	1.51	1.49	1.26		1.33	1.30 1.39
Actual K-Cup Units	650	720	683	832	1,046	1,146 1,346
Difference In K-Cups	(16)	(44)	(7)	57	12	3 288
Surprise (percentage)	-2%	-6%	-1%	7%	1%	0% 27%

The predicted attachment rate is calculated by reducing the attachment rate from same quarter of the previous year by 13%. Predicted attachment rate calculated by applying a constant year-over-year change in Attachment Rate (-13%) to the year- ago period’s actual attachment rate. Predicted K-Cup Units = Installed Base x predicted attachment rate x days/year. Green Mountain stopped providing K-Cup units data after Q4 2010. Q1 2011 – Q3 2011 K-Cup units are Greenlight estimates based on management’s comments on quarterly earnings conference calls of approximate percentage growth in K-Cup units.

Exhibit 7

ENTERPRISE VALUE/REVENUE MULTIPLE AND YEAR OVER YEAR REVENUE GROWTH RATE

6.0

Yr/Yr Revenue Growth EV/LTM Revenue

1

40%

120%

5.0

100%

(
Yr/Yr Revenue Growth

Rate
)4.0

(
EV/LTM Revenue
)80%

3.0

60%

2.0
40%

1.0
20%

0.0

9/28/2002

1/17/2004

4/9/2005

7/1/2006

9/29/2007

12/27/2008

3/27/2010

0%

6/25/2011

Note: For each EV/LTM revenue point plotted, the revenue multiple is calculated by dividing the enterprise value by the latest 12 months revenue. Enterprise value is calculated by the methodology shown in Exhibit 8, but the stock price for each quarter used is calculated by using ((high stock price for the qtr + stock low price for the qtr)/2).

Source: SEC filings and stock prices via the CapitalIQ database.

Exhibit 8

(
Source: Bloomberg consensus estimates as of October 13, 2011. Market valuation metrics as of October 14, 2011.
Exhibit 9
VALUATION MULTIPLES
Source: Bloomberg consensus estimates as of October 13, 2011. Market valuation metrics as of October 14, 2011.
)ENTERPRISE VALUE CALCULATION

Stock Price	$92.09
Diluted Shares Outstanding	158.80
Market Capitalization	14,621
Net Debt	315
Enterprise Value	$14,936 Million

$1.61

$2.59

EPS 2011E

EPS 2012E

Green Mountain	$	Multiple
Revenue 2011E	$2,701	5.5x
Revenue 2012E	$4,346	3.4x
EBIT 2011E	434	34.4x
EBIT 2012E	697	21.4x
	EPS 2011E	57.2x
	EPS 2012E	35.6x
S&P 500
$97.03	12.4x
$11 2.00	10.7x

40,000

Exhibit 10

RETAIL DISTRIBUTION TRENDS

(
15,200
) (
Supermarket Locations Retail Stores
)35,000

(
14,400
)30,000

(
10,000
)25,000

20,000

(
2,600
) (
17,900
) (
19,000
)15,000

(
10,000
) (
1,300
) (
13,800
) (
20,000
)10,000

(
200
7,000
)5,000

(
3,500
) (
300
)0

Dec 2004 Dec 2005 Dec 2006 Dec 2007 Dec 2008 Dec 2009 Dec 2010 Jun 2011

Source: GMCR presentation given at conference on August 10, 2011 (approximate totals based on company estimates).

Exhibit 11

LONG-TERM EPS — BULL CASE EARNINGS MODEL

Shares Outstanding

160

Bull Case: Green Mountain Can Earn $8-10 per Share
Target Market (Homes that brew 2+ cups/day)		64M
Forecast Keurig share of Target Market		33%
Fully Penetrated Installed Brewer Base		21M
Average Daily K-Cups Per Brewer	2.00
Days/Year		365
Annual K-Cup Production	15,558M
Profit per K-Cup	$0.15
Annual K-Cup profit (EBIT)	$2,352M
Annual K-Cup Profit (After tax and Interest)	$1,440M
Long Term EPS (At Home Sales)	$9.00

Note: Assumes $30 million interest expense, 38% tax rate and 160M shares. Source: SunTrust Robertson Humphrey research note published July 21, 2011.

Exhibit 12

(
Note: Assumes $30 million interested expense, 38% tax rate and 160M shares. Data edited to correct rounding errors in original data sources.
Bull Case
Source: SunTrust Robertson Humphrey research note published July 21, 2011 Bear Case Source: Greenlight.
Exhibit 13
COST PER SERVING
—
K-CUPS VERSUS DRIP-BREWING METHODS
)LONG TERM EPS — BULL CASE VERSUS BEAR CASE

64M

33%

21M

365

160

Bull Case	Bear Case
Target Market (Homes that brew 2+ cups/day) 64M
Forecast Keurig share of Target Market 33%
Fully Penetrated Installed Brewer Base 21M
Average Daily K-cups Per Brewer 2.00	1.25
Market Share Captured by Private label	0.20
Days/Year 365
Annual K-cup Production 15,418M	7,709M
Profit per K-cup $0.15	$0.12
Annual K-cup profit (EBIT) $2,313M	$925M
Annual K-cup Profit (After tax and Interest) $1,415M	$555M
Shares Outstanding 160
Long Term EPS (At Home Sales) $8.85	$3.47

270

270

10.78

270

4.0 ¢

113

45

18

18

11.99

18

66.6 ¢

18

Dunkin Donuts: Original Blend

11.99

K-Cups Are Expensive
Brand	Price $	Servings	Per Serving
Drip – Lower End
Folgers: Custom Roast Ground	8.86				270	3.3 ¢
Folgers: Medium Classic Roast		10.78		4.0 ¢
Maxwell House: Daily Brew Ground	7.48	2.8 ¢
Maxwell House: Tassimo Classic Roast
Drip – Higher End
Dunkin Donuts: Ground Coffee (40 oz)	21.73		113	19.2 ¢
	Dunkin Donuts: Original Blend	24.35	21.5 ¢
Starbucks: Sumatra (1 lb)	14.95		45	33.0 ¢
Starbucks: Breakfast Blend (1 lb)	11.95	26.3 ¢
K-Cup – Lower End
Folgers: Black Silk Dark Roast	11.28	62.7 ¢
GMCR: Breakfast Blend	16.28	24	67.8 ¢
Tully’s (GMCR): Kona Blend			11.99		66.6 ¢
GMCR: Donut House Regular
K-Cup – Higher End
Barista Prima (GMCR) Coffeehouse Blend	14.99	83.3 ¢
Café Escapes (GMCR): Chai Latte	12.99	16	81.2 ¢
14	85.6 ¢

Source: Greenlight pricing checks at various retailers including Bed Bath & Beyond, Amazon.com, Wal-Mart, and Starbucks.com.

Exhibit 14

BULLWHIP EFFECT

Impact of Inventory Stocking on Revenue Growth

Q1

$2.5

Q3

$2.5

Q4

$2.5

Q1

$2.5

Q3

$2.5

Q4

$2.5

0

0

0

0.25

0.25

0.25

0.25

0.25

0.25

0.25

$2.50

$2.50

$2.50

$2.75

$2.75

$2.75

$2.75

$2.75

$2.75

10.0%

10.0%

0.0%

0.0%

Base Business			Q1 $2.5	Year 1 Q2 $2.5			Q3 $2.5			Q4 $2.5	Year 2 Q2 $2.5	Year 3 Q2 $2.5
New Customer sales to end consumer				0								0.25
New Customer sales to meet inventory needs	0.08
Total revenue				$2.50	$2.83							$2.75
Yr/Yr revenue growth	13.2%			10.0%	-2.8%			0.0%

In the example above, if a retailer holds 30 days of inventory, which is typical for a grocery store, then a retailer which buys

$1 million in K-Cups per year for resale will have to also hold $0.08 million of K-Cups in inventory at any time. If it becomes a retailer for Green Mountain at the beginning of Q1 in Year 2, it will buy $0.25 million of K-Cups for sale to end customers and

$0.08 million in product to hold in inventory for a total of $2.83 million. In other words, 24% (0.08/(0.25+0.08)) of the revenue for the first quarter for the new customer will be to build inventory, not for sales to end customers.

Exhibit 15

GREEN MOUNTAIN’S MAJOR ACQUISITIONS

n/a

n/a

12-13%

Acquisition Date (1)	Tully’s Mar 27 ’09	Timothy’s Nov 13 ’09	Diedrich May 11 ’10	Van Houtte Dec 17 ’10
Acquisition Price (1)	$40.3M	$155.7M	$305.3M	$907.8M
Revenue (2)	$30.4M	$43.7M	$86.5M	$443.0M
Multiple (EV/Revenue)	1.3x	3.6x	3.5x	2.0x
EBITDA (3)		n/a	$7.4M	$91.6M
Multiple (EV/EBITDA)		n/a	41.3x	9.9x
Approx.% of system-wide K-cups (4)	3%		12-13%	< 12%
Allocation of Price to Goodwill (1)	$25.8M	$69.3M	$217.5M	$472.3M
Allocation of Price to Intangibles (1)	$12.4M	$98.3M	$100.2M	$37 5.1 M
Allocation of Price to GW & Int.	$38.2M	$167.6M	$317.7M	$847.4M
% of Purchase Price	95%	108%	104%	93%

Notes:

1. GMCR FY2010 10-K, GMCR 10-Q for 3Q 2011

2. Tully’s:

http://investor.gmcr.com/releasedetail.cfm?ReleaseID=466783.

Timothy’s: Estimate based on GMCR disclosure that Timothy’s contributed $37.9M of revenue in FY 2010 (GMCR 10-K for FY 2010), grossed up to full year.

Diedrich: TTM as of March 3, 2010 (See DDRX 10-Q for period ended March 3, 2010 and DDRX 10-K for FY ended June 24, 2009).

Van Houtte: TTM as of Aug 21, 2010 (See GMCR Sep 14, 2010 presentation at

http://investor.gmcr.com/events.cfm).

3. Diedrich: TTM as of March 3, 2010 (See DDRX 10-Q for period ended March 3, 2010 and DDRX 10-K for FY ended June 24, 2009).

Van Houtte: TTM as of Aug 21, 2010 (See GMCR Sep 14, 2010 presentation at
http://investor.gmcr.com/events.cfm).

4. Greenlight conversation with GMCR management.

Exhibit 16

K-CUPS PRODUCED FOR GREEN MOUNTAIN’S ADDITIONAL CAPITAL EXPENDITURES

FY

FY

FY

2008

2009

2010

4.7

			FY
Millions (except per dollar data)	2007
Estimated GMCR K-cup Units Sold (1)	359	579	1,056	2,290
Change in K-cup Units	104	220	477	1,234
Capital Expenditures for Fixed Assets (2)	$21.80	$48.70	$48.30	$118.00
Incremental K-cup Units per Dollar of CapEx		4.5	9.9	10.5

1.
Greenlight’s estimate excludes K-Cups manufactured by licensees.

2. GMCR 10-K for 2010, 2009, and 2008. For 2011 and 2012 estimates, based on GMCR growth and prior level of capital efficiency.

Exhibit 17

SHORT INTEREST

1/14/2011

–

10/14/2011

5.1

5.0

4.5

5.3

4.7

3.6

Settlement Date	Short Interest	Avg Daily Share Volume	Days To Cover
1/14/2011	28,042,996	2,157,102	13.0
1/31/2011	27,250,984	2,277,352	12.0
2/15/2011	26,128,407	6,518,989	4.0
2/28/2011	25,404,512	4,996,729		5.1
3/15/2011	26,053,365	7,213,670		3.6
3/31/2011	21,548,151	2,879,319	7.5
4/15/2011	22,390,234	2,279,614	9.8
4/29/2011	20,278,617	1,730,980	11.7
5/13/2011	17,660,075	4,252,724	4.2
5/31/2011	17,770,180	3,504,664
6/15/2011	17,711,007	2,003,627	8.8
6/30/2011	17,855,334	1,984,753	9.0
7/15/2011	16,112,509	2,205,374	7.3
7/29/2011	15,077,580	3,011,048
8/15/2011	14,687,247	3,847,851	3.8
8/31/2011	15,375,802	3,415,981
9/15/2011	15,521,932	2,921,043
9/30/2011	15,176,168	3,232,228
10/14/2011	17,068,121	4,747,368

Source:

www.nasdaq.com/symbol/gmcr/short-interest#ixzz1jwh4UIjg.