Coffee Holding Co., Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended October 31, 2017; filed January 29, 2018. The company is an integrated U.S. coffee roaster and dealer, selling wholesale green coffee, private-label and branded coffee, and tabletop roasters. Results include Comfort Foods, acquired in February 2017.
Financial performance and liquidity
| Metric | FY2017 | FY2016 |
|---|---|---|
| Net sales | $77.13 million | $78.95 million |
| Gross profit / margin | $12.15 million / 15.8% | $11.88 million / 15.0% |
| Operating income / margin | $1.22 million / 1.6% | $3.86 million / 4.9% |
| Net income attributable to Coffee Holding / diluted EPS | $467,262 / $0.08 | $2.21 million / $0.36 |
| Cash from operations | $1.48 million | $1.61 million |
| Cash at year-end | $2.33 million | $3.23 million |
| Line of credit balance | $8.41 million | $6.96 million |
Operating cash flow was outweighed by $3.57 million of investing outflows, mainly the Comfort Foods acquisition, while financing provided $1.19 million. Cash fell by $902,331 during the year. Year-end working capital was $20.61 million, down $1.06 million year over year; current assets were $33.66 million and current liabilities $13.05 million. The audited balance sheet reports total assets of $40.00 million and total equity of $25.59 million.
Changes and notable items
- Sales declined 2.3%. Lower wholesale sales to the largest green-coffee customer—approximately $16.8 million less—were partly offset by other customers; fourth-quarter revenue rose $4.3 million, or 25%, year over year.
- Gross margin improved 0.8 percentage points, but operating income fell sharply as operating expenses rose $2.91 million to $10.93 million. The company cited Comfort Foods, a full year of Sonofresco integration and higher freight costs. It also cited lower OPTCO profitability and acquisition integration as constraints on margin improvement.
- Comfort Foods was acquired for $2.3 million cash, with approximately $605,000 of its existing bank debt also paid; reported acquisition cash outflow, net of acquired cash and liabilities, was $2.89 million.
- The company recorded a net $326,802 loss on realized and unrealized coffee futures/options activity, compared with a $1.06 million net gain in FY2016. Management said it was scaling back hedging and short-term futures/options trading, while retaining limited use for price exposure and supply management.
- Four customers represented approximately 25% of FY2017 sales and 46% of year-end receivables. GMCR accounted for 8% of sales, down from 29% in FY2016.
Outlook, risks and contingencies
No quantified earnings or revenue guidance is provided. Management’s stated strategy includes selective acquisitions and alliances, expanding Hispanic-market brands, increasing sales through existing channels, and developing foodservice and niche products. The company expected to arrange a replacement or extension of its Sterling credit facility by its February 28, 2018 maturity; negotiations were ongoing at the filing date.
- The $12 million revolving facility was secured by company assets, bore interest at LIBOR plus 2.4% under the amended agreement, and had a $3 million OPTCO sublimit. The reported year-end borrowing was $8.41 million. Borrowers were in covenant compliance at October 31, 2017; the facility includes minimum-working-capital and other financial and operating restrictions.
- Key business risks include coffee-price and supply volatility, limits or delays in passing cost increases to customers, hedging losses, customer concentration, competitive pressure, acquisition integration, and dependence on key personnel. Five suppliers accounted for approximately 50% of green-coffee purchases; one related-party supplier accounted for about $6.7 million of FY2017 purchases.
- The filing reports no material pending litigation beyond routine business matters and no material off-balance-sheet arrangements. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor did not attest to internal-control effectiveness.
- The company repurchased 57,367 shares during FY2017 and authorized a $2 million repurchase program. It does not currently pay dividends and does not expect to do so in the foreseeable future.
Most important facts for investors to verify
- Whether the company renewed or extended the Sterling facility before maturity, and the resulting terms, availability and covenant headroom.
- Whether fourth-quarter sales growth continued and whether customer concentration—particularly the reduced GMCR business—stabilized.
- Whether Comfort Foods integration, freight and OPTCO performance improved operating profitability and cash generation.
- Current coffee futures exposure and realized/unrealized results, given the stated reduction in hedging activity.
- Reconcile selected-data figures with the audited statements: the filing’s selected financial data lists FY2017 total assets of $40.132 million, while the audited balance sheet reports $40.000 million.