Coffee Holding Co., Inc. — FY2014 Form 10-K
Reporting period: Fiscal year ended October 31, 2014. This filing reports annual results; it does not provide a clear standalone fiscal fourth-quarter income statement.
Business context
Coffee Holding is an integrated U.S. coffee roaster and dealer. Its business comprises wholesale green coffee, private-label coffee, and coffee sold under seven proprietary or licensed brands. Green coffee sales to Green Mountain Coffee Roasters (GMCR) represented approximately 60% of FY2014 net sales.
Financial performance and position
| Metric | FY2014 / October 31, 2014 | FY2013 / October 31, 2013 |
|---|---|---|
| Net sales | $108.9 million | $134.0 million |
| Gross profit / margin | $15.5 million / 14.3% | $6.0 million / 4.5% |
| Operating income (loss) | $8.0 million | $(1.6) million |
| Net income (loss) attributable to Coffee Holding | $5.0 million; $0.78 per diluted share | $(1.5) million; $(0.23) per diluted share |
| Cash from operating activities | $0.03 million | Cash used: $3.28 million |
| Cash | $3.78 million | $4.04 million |
| Revolving credit balance | $2.50 million | $1.23 million |
| Working capital | $23.48 million | $19.42 million |
| Total assets / total liabilities | $39.0 million / $12.9 million | $32.4 million / $10.3 million |
Sales fell 18.8%, primarily reflecting a 20% decline in pounds of green coffee sold amid market volatility and higher coffee prices. Gross margin improved sharply, supported by favorable inventory positions and $3.74 million of net realized and unrealized gains on coffee futures and options (versus $5.83 million in net losses in FY2013). Operating expenses were essentially flat. Interest expense was $80,493.
Operating cash flow was nearly breakeven despite the return to profitability: higher receivables and inventory absorbed cash. Inventory increased to $15.21 million from $9.37 million, largely from green coffee. Capital spending was $504,644. Financing provided $221,548; the company repurchased 156,415 shares for $995,729. The prior dividend program had been terminated.
At year-end, the $7 million secured revolving facility had $2.50 million outstanding and variable-rate pricing. The company reported compliance with its financial covenants. It had no long-term debt reported.
Material changes and management commentary
- FY2014 returned to substantial profitability after a FY2013 loss, but results were materially affected by coffee hedging gains and inventory timing.
- Sales to GMCR declined as green coffee volumes fell; management cited reduced customer buying amid market volatility and high coffee prices. Sales to smaller specialty roasters increased, partly offsetting the decline.
- Management’s stated priorities include selective acquisitions and brand or alliance opportunities, growth in Café Caribe and Café Supremo, broader product penetration, food-service expansion, and pursuing sales in China and other Pacific Rim markets. These are plans, not quantified guidance.
Outlook, risks, and contingencies
- Management expected to fund operations, liabilities, capital expenditures, and debt service through October 31, 2015 from operating cash flow and the credit facility. The facility was due to expire February 17, 2015; renewal discussions were ongoing, with no assurance of extension or acceptable terms. The reported balance had risen to $4.5 million as of January 19, 2015.
- Customer concentration is significant: GMCR accounted for about 60% of sales and 48% of year-end accounts receivable. The company generally lacks long-term customer contracts.
- Coffee price and supply volatility, hedge effectiveness, and timing of passing cost increases through to customers may affect margins and cash flow. FY2014 hedge results should not be assumed to recur; futures and options are not designated as accounting hedges, and gains and losses run through cost of sales.
- Purchasing is also concentrated: one supplier accounted for about 19% of FY2014 product purchases. The company reports no long-term supplier agreements, but believes alternatives are available. A supplier’s employee is a company director.
- Other disclosed risks include competition from larger coffee companies, dependence on key personnel and the Colorado facility, shipping disruptions, and general economic and consumer-demand conditions. Management reported no material pending legal proceedings beyond routine litigation.
Investor verification points
- Assess whether the FY2014 margin and earnings improvement is sustainable without the $3.74 million net hedge gain and favorable inventory effects.
- Monitor GMCR purchasing levels, customer receivable concentration, and the ability to diversify sales.
- Verify renewal terms and availability under the Sterling credit facility, particularly given the higher January 2015 borrowing balance.
- Review inventory growth, green coffee pricing exposure, and cash conversion; operating cash flow was only $30,066 despite reported net income.
- Reconcile reported earnings and equity measures across filing tables: consolidated net income includes noncontrolling interest, and total equity includes noncontrolling interest.
The independent auditor issued an unqualified opinion on the consolidated financial statements. Management reported effective disclosure controls and internal control over financial reporting; the auditor did not attest to internal-control effectiveness.