Coffee Holding Co., Inc. — FY2012 Form 10-K
Reporting period: Fiscal year ended October 31, 2012; this is an annual report, not a standalone fourth-quarter filing. Coffee Holding roasts and distributes private-label and branded coffee and sells wholesale green coffee. Its fiscal 2012 sales exceeded 55 million pounds for the first time.
Financial performance
| Metric | FY2012 | FY2011 | Change |
|---|---|---|---|
| Net sales | $173.7 million | $146.8 million | +18.3% |
| Gross profit | $12.0 million | $8.5 million | +40.5% |
| Gross margin | 6.9% | 5.8% | +1.1 percentage points |
| Operating income | $4.4 million | $1.2 million | Higher |
| Net income attributable to Coffee Holding | $2.5 million | $0.8 million | Higher |
| Diluted EPS | $0.37 | $0.14 | Higher |
| Cash from operating activities | $8.0 million | $(4.1) million | Improved |
| Cash and cash equivalents | $7.6 million | $4.2 million | Higher |
| Working capital | $19.4 million | $19.6 million | Down $0.2 million |
| Line of credit outstanding | $0.6 million | $1.8 million | Down $1.3 million |
Cost of sales was $161.6 million, or 93.1% of sales, versus $138.2 million, or 94.2%, in FY2011. Management attributed improved gross margin to higher-margin brand sales, particularly Café Caribe, and better hedge results. Operating expenses rose 3.6% to $7.6 million. Other expense increased to $0.3 million, including a $0.17 million equity-method investment loss. The effective tax rate rose to 36% from 21%.
Investing activities used $2.7 million, mainly for $2.1 million in equity-method investments and $0.6 million in equipment. Financing activities used $2.0 million, including debt repayment and $0.8 million in dividends. The company reported no long-term debt; total liabilities were $14.4 million and consolidated equity was $23.8 million at year-end.
Material changes and business developments
- Sales increased with higher coffee volumes; management cited growth in branded sales as a contributor to margin improvement.
- Operating cash flow swung from use of $4.1 million to generation of $8.0 million, principally reflecting higher earnings and reductions in receivables and inventory.
- The $7 million revolving credit facility was extended to February 17, 2014, with interest set at the Wall Street Journal prime rate plus 1%. Year-end borrowings were $562,500; the facility is secured by company assets and includes financial and operating covenants. The company said it was in compliance.
- The company invested in Global Mark, a venture for instant coffee, and recognized an equity-method loss of $168,069. It withdrew from the venture on December 10, 2012, receiving approximately $1.7 million in cash, receivables and inventory; a write-down of approximately $130,000 was recognized in FY2012.
- After Hurricane Sandy damaged inventory in a New Jersey public warehouse, the company reduced inventory and recorded a $353,000 insurance receivable. The insurer acknowledged the claim and indicated payment was forthcoming.
Outlook, risks and contingencies
No specific earnings or revenue guidance was provided. Management expected to fund operations, liabilities, capital expenditures and debt payments through October 31, 2013 using operating cash flow and the credit facility. Its stated growth priorities include selective acquisitions and alliances, expanding Café Caribe and Café Supremo, increasing product penetration and developing food service sales.
- Customer concentration: Green Mountain Coffee Roasters represented approximately 62% of FY2012 sales, up from 56%. It also represented 49% of year-end receivables. Customer agreements generally lack long-term purchase commitments.
- Supplier concentration and related party: Approximately 80% of green coffee purchases came from ten suppliers. Purchases from a supplier whose employee was a company director were approximately $31.9 million in FY2012; the filing describes this supplier as a related party.
- Commodity and hedging exposure: Coffee prices, supply and hedge performance can affect costs, margins and earnings. The company held 319 futures contracts to purchase about 12.0 million pounds at a weighted average of $1.66 per pound; reported market prices were approximately $1.55–$1.65. Derivative gains and losses are recorded in cost of sales.
- Other risks: Competition from larger coffee companies, reliance on key personnel and the Colorado facility, shipping disruptions, consumer demand, variable-rate borrowing and covenant compliance could affect results. The company also disclosed no material pending legal proceedings other than routine litigation.
- Audit and controls: The independent auditor issued an unqualified opinion on the financial statements. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor did not attest to internal control effectiveness.
Investor facts to verify
- Whether Green Mountain’s continued purchasing supports the company’s highly concentrated sales and receivables base.
- How coffee-price movements, futures positions and hedge gains or losses affect gross margin and cash flow.
- The ultimate collection and timing of the $353,000 Hurricane Sandy insurance claim.
- The final recovery and accounting for Global Mark following the post-year-end withdrawal.
- Credit-facility availability, covenant headroom and the company’s ability to fund its stated plans while maintaining quarterly dividends.
- Related-party supplier purchasing terms and the materiality of the reported relationship.