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Einhorn specifically singled out the cozy relationship between GMCR and M. Block & Sons.
"But we think two of the bigger issues we raised are the accounting issues stemming from GMCR’s capital spending and the relationship with the company’s key fulfillment partner, M. Block & Sons.
GMCR spent $350 million to expand its operations in 2011 and plans to spend twice that in 2012. It costs about $20 million to create enough manufacturing capacity to roast and package 1 billion K-cups a year. GMCR needs to expand capacity by a few billion K-cups a year, which may explain perhaps $100 million of annual spending. So where did GMCR spend the balance of the $350 million in 2011 and where does it plan to spend the balance of $700 million in 2012? If it can’t be explained, it raises the question: where is the money going?"
It should be noted that Green Mountain has had accounting issues in the past. The Securities and Exchange Commission examined Green Mountain's accounting in 2010. GMCR had to restate four years' worth of results last November.
Perhaps more concerning is the fact that GMCR does not generate any free cash flow.
Green Mountain generated negative free cash flow in each of the three last fiscal years (ended September). GMCR intends to spend $700 million in capital spending in fiscal 2012. Subsequently, investors cannot expect any free cash flow in 2012.
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