Green Mountain Coffee Roasters: Earnings Beat, Leverage Jumps

Green Mountain Coffee Roasters GMCR shares popped 23.45 percent at the open after the company reported better than expected earnings after the close Tuesday. The company reported fourth quarter EPS of $0.59 which beat comparable estimates of $0.479 earnings per share. However, the good news really ends there.

Students of accounting know that EPS and other metrics can be artificially boosted through accounting gimmicks, and so it is important to analyze the financial statements to see any discrepancies or significant changes that occurred in the last quarter that could have led to earnings jumping or simply that cause worries. And with Green Mountain Coffee Roasters, there are a few numbers that stand out.

Looking at the quarterly balance sheet, the cash position of the company fell nearly 59 percent in the quarter to $58.29 million from $138.99 million in the third quarter. Also, receivables jumped from $265.86 million to $363.77 million in the quarter, meaning that the 4.65 percent beat in revenue is more than due to the fact that they booked revenue for which they have yet to be paid. In other words, revenue figures would have missed estimates without increasing the accounts receivable in the quarter.

Further, inventories jumped from $667.01 million to $768.44 million in the quarter after remaining relatively flat over the past year. This large jump in inventories could be a sign that demand is slowing for the company and orders are not coming in as expected. In addition, net debt jumped to $418.44 million from $270.12 million, partially explained by the decrease in cash but also from increased debt levels. In fact, net debt to equity jumped from 12.14 times in the third quarter to 18.42 times in the fourth quarter.

This last part is interesting because the increased leverage could cause some fund managers to sell portions of positions in the stock. Consider a fund that uses software to allocate portfolio weightings based on risk to minimize risk while maximizing returns. The increase in leverage is an increase in risk for the stock for some funds, especially less aggressive funds, which could cause their optimal allocation to the stock to drop and force them to sell over the next few days to weeks.

Aside from the increase in accounts receivable boosting sales and earnings per share, there were also one-time items such as a gain on currencies that helped to boost earnings. Also, gross margins were slightly weaker than the previous quarter at 33.42 percent but operating and profit margins showed slight increases quarter-over-quarter. Lastly, depreciation of assets jumped 27.5 percent from the previous quarter, an interesting note in the income statement.

Lastly, looking at cash flows, cash flow from operations was actually negative in the quarter, but has been negative in the fourth quarter of each year for the past three years. Most of these decreases occurred from the line-item "Changes in non-Cash Capital," which saw a decrease of an astounding $239.11 million in the quarter. This item is calculated as the change in current assets less the change in current liabilities and appears to be seasonal, as each fourth quarter this item sees a significant drop.

As shown, there was good and bad in the report. The headline data was strong but there were several items in the statements that need explaining. It will be very interesting to watch how funds react to the increased leverage and if in fact there is forced selling due to risk models. Also, it will be interesting to see how the increase in receivables plays out over the next few quarters and whether or not they will have to write any of the receivables off.