Coffee Holding Co., Inc. — FY2015 Form 10-K
Reporting period: Fiscal year ended October 31, 2015; this is an annual report, not a standalone fourth-quarter report. Coffee Holding is an integrated U.S. coffee roaster and dealer selling wholesale green coffee, private-label coffee, and its own and licensed brands. Its product lines are reported as one operating segment.
Financial performance and position
| Metric | FY2015 | FY2014 |
|---|---|---|
| Net sales | $118.2 million | $108.9 million |
| Gross profit / margin | $5.7 million / 4.8% | $15.5 million / 14.3% |
| Operating income (loss) | $(1.9) million | $8.0 million |
| Net income (loss) attributable to Coffee Holding | $(1.4) million; $(0.23) per diluted share | $5.0 million; $0.78 per diluted share |
| Operating cash flow | $(2.3) million | $0.03 million |
- Sales rose 8.5%, reflecting higher green and roasted coffee sales, but cost of sales increased 20.5% and consumed 95.2% of revenue, compared with 85.7% in FY2014.
- Cash at year-end was $3.9 million. Working capital was $21.9 million, down from $23.5 million. Total assets were $35.3 million and total equity, including noncontrolling interest, was $24.4 million.
- Consolidated line-of-credit balances totaled $5.55 million at year-end, versus $2.50 million a year earlier. The company reported no long-term debt. The credit facility is secured by company assets, has a maximum $9 million commitment, and expires February 28, 2017. A separate OPTCO facility has a $3 million maximum and is guaranteed by Coffee Holding.
- Investing activities used $0.39 million; financing activities provided $2.75 million. Cash increased by $0.07 million.
Changes, outlook, and key risks
- The primary cause of the earnings and margin deterioration was a net $5.5 million loss on coffee futures and options in FY2015, including losses associated with liquidating positions as the company scaled back hedging and short-term trading. FY2014 recorded net gains of $3.7 million on these contracts.
- Commodity coffee prices were $1.21 per pound at October 31, 2015, versus $1.88 a year earlier. Management cautioned that price changes, hedging results, and timing of customer price increases can affect margins and cash flow.
- Management expected to fund operations, liabilities, capital expenditures, and debt payments through October 31, 2016 using operating cash flow and its credit facility. No earnings or revenue guidance was provided.
- Customer concentration is material: Keurig Green Mountain accounted for 54% of FY2015 sales and 38% of year-end receivables. The company has no material long-term customer agreement and noted uncertainty about the effect of JAB’s proposed acquisition of GMCR.
- Five suppliers represented approximately 64% of FY2015 purchases. One supplier accounted for about $22.1 million, or 21%, of purchases; an employee of that supplier is a company director. The company reported alternate suppliers were available.
- Other risks include coffee supply and price volatility, dependence on coffee as its core commodity, competition, key-person reliance, variable-rate borrowing and credit covenants. The company reported covenant compliance at year-end. It also reported routine litigation only, no material off-balance-sheet arrangements, and approximately $2.22 million of future minimum lease payments.
- The board authorized a new share repurchase program of up to $2 million in September 2015; 53,687 shares were repurchased during the year. The company said it did not intend to pay cash dividends in the foreseeable future.
Important facts for investors to verify
- Review the financial statements and notes for the futures/options loss, position valuations, and the planned reduction in hedging activity.
- Assess GMCR’s continued purchasing, receivables exposure, and the potential effect of its proposed ownership change.
- Confirm borrowing availability, collateral and covenant terms, and the company’s ability to generate operating cash after FY2015’s cash outflow.
- Reconcile the filing’s differing net-loss presentations: the statement of operations reports a $1.413 million loss attributable to Coffee Holding, while the cash-flow statement starts with a $1.330 million loss before noncontrolling interest.
- Check the share-repurchase disclosure against the program authorization and actual amounts: the filing’s narrative and table appear inconsistent about the amount spent and remaining authorization.
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.