Coffee Holding Co., Inc. — FY2013 Form 10-K
Business context and period. The company roasts and sells private-label and branded coffee and wholesales green coffee. This annual filing covers the fiscal year ended October 31, 2013; comparisons are with FY2012. It is not a standalone fourth-quarter report.
Financial performance and position
| Metric | FY2013 / Oct. 31, 2013 | FY2012 / Oct. 31, 2012 |
|---|---|---|
| Net sales | $134.0 million | $173.7 million |
| Gross profit / margin | $6.0 million / 4.5% | $12.0 million / 6.9% |
| Operating income (loss) | $(1.55) million | $4.40 million |
| Net income (loss) attributable to Coffee Holding | $(1.48) million; $(0.23) per share | $2.49 million; $0.39 basic and $0.37 diluted per share |
| Cash from (used in) operations | $(3.28) million | $8.03 million |
| Cash | $4.04 million | $7.57 million |
| Working capital | $19.42 million | $19.40 million |
| Line-of-credit debt | $1.23 million | $0.56 million |
| Total assets / total liabilities | $32.40 million / $10.31 million | $38.25 million / $14.45 million |
| Total equity | $22.08 million | $23.80 million |
Investing activities used $0.54 million; financing activities provided $0.28 million. The $7 million revolving facility is secured by company assets, bears a rate stated as prime plus 1% (4.25% at year-end), and was extended to February 17, 2015. The company reported covenant compliance at October 31, 2013.
Material changes versus FY2012
- Sales fell 22.8%, which management attributed primarily to substantially lower coffee commodity prices—about 60% lower during the year—and lower selling prices per pound.
- Gross margin declined 2.4 percentage points. Management attributed the deterioration principally to coffee-hedging results: FY2013 included approximately $6.21 million of net realized hedging losses and $0.38 million of unrealized gains, compared with materially smaller net hedging losses in FY2012.
- The company moved from operating and net income to losses. Management said the earnings decline reflected increased realized hedge losses and decreased unrealized gains.
- Cash from operations swung from an $8.03 million source to a $3.28 million use; cash declined by $3.53 million. Working capital was nearly flat, while line-of-credit borrowings increased by $0.67 million.
- The regular $0.03-per-share quarterly dividend program was terminated in June 2013. FY2013 dividends declared were $0.06 per share, compared with $0.12 in FY2012.
Outlook, risks, and notable items
- Management expected to fund operations, liabilities, capital expenditures, and debt payments through October 31, 2014 with operating cash flow and use of the credit facility. No specific revenue or earnings guidance was provided.
- Customer concentration is significant: Green Mountain Coffee Roasters accounted for 60% of FY2013 sales and 51% of year-end receivables. Customer agreements generally lack long-term purchase commitments.
- Supplier concentration and related-party exposure warrant attention. Ten vendors supplied about 75% of FY2013 purchases; Rothfos, whose employee was a company director, represented approximately $31.2 million, or 25%, of purchases. The company said alternative suppliers were available.
- Coffee prices and supply are volatile. The company uses futures and options, but hedges can increase costs when prices fall sharply and do not eliminate price or counterparty risk. Year-end positions included 149 futures contracts covering 5.59 million pounds and 120 options covering 4.5 million pounds.
- The company withdrew from Global Mark in December 2012 after the venture failed to develop a significant customer base beyond Coffee Holding; related investment losses and write-downs were recorded. The year-end equity-method investment balance was $98,178.
- Other risks include competition, the reliance on key executives, the Colorado facility and shipping infrastructure, and the revolving facility’s financial covenants. Management reported effective disclosure controls and effective internal control over financial reporting; the auditor did not provide an internal-control attestation.
- Marcum LLP became the independent auditor in April 2013, replacing ParenteBeard LLC. The filing reports no accounting disagreements or reportable events with the predecessor firm. Other than routine matters incidental to business, no pending legal proceedings were disclosed.
Important facts for investors to verify
- Review the audited statements and derivative disclosures to reconcile the substantial hedge-related cost impact and assess exposure under the company’s hedging approach.
- Assess the sustainability of cash generation, the fall in cash, and reliance on the revolving facility, including borrowing availability under its receivables-and-inventory borrowing base and covenant requirements.
- Evaluate the consequences of GMCR’s 60% sales concentration, lack of long-term customer contracts, and the related concentration in accounts receivable.
- Confirm the nature and terms of related-party purchases from Rothfos and monitor supplier concentration and replacement sourcing.
- Verify the status and realizability of the $1.33 million current deferred tax asset, including the planned net operating loss carryback and management’s assumptions supporting recognition.