Coffee Holding Co., Inc. — FY 2011 Form 10-K
Business context and period: The company roasts and sells private-label and branded coffee and distributes wholesale green coffee. This filing covers the fiscal year ended October 31, 2011; comparative figures are for FY 2010.
Key financial results
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Net sales | $146.8 million | $83.5 million |
| Gross profit / margin | $8.5 million / 5.8% | $10.6 million / 12.6% |
| Operating income / margin | $1.2 million / 0.8% | $4.0 million / 4.8% |
| Net income | $812,000 | $2.4 million |
| EPS, basic / diluted | $0.15 / $0.14 | $0.44 / $0.44 |
| Cash from operations | $(4.1) million | $1.3 million |
Sales rose 75.8%, reflecting higher coffee prices and increased volume; the company sold more than 48 million pounds for the first time. Profitability declined as green coffee costs rose and hedging activity shifted from gains to losses. Net realized and unrealized commodity-contract losses totaled approximately $3.4 million in FY 2011, versus gains of approximately $1.4 million in FY 2010.
- Liquidity: Cash was $4.2 million; working capital was $19.6 million, up from $11.2 million. Current assets were $35.7 million and current liabilities $16.1 million.
- Debt: Revolving credit borrowings were $1.82 million, down from $2.31 million; no long-term debt was reported. The $7 million secured facility bears a variable rate stated as a 5% reference rate plus 1% and includes financial and operating covenants. The company reported compliance at year-end.
- Financing and equity: A stock-and-warrant offering generated approximately $8.3 million in net proceeds. FY 2011 dividends were $0.12 per share.
- Balance sheet: Total assets were $38.8 million and total liabilities $16.8 million at October 31, 2011.
Material changes and outlook
- Operating cash flow turned negative, chiefly as receivables and inventory increased with the expansion in sales; financing cash flow benefited from the equity offering.
- OPTCO, acquired in May 2010, was included for the full fiscal year in 2011 versus about five and a half months in 2010, contributing to higher selling and administrative costs.
- After year-end, the company agreed to acquire a 40% interest in Global Mark, an instant-coffee supplier, with investment of up to $2.0 million; approximately $535,000 had been paid by the filing date. The company expects preferred pricing on instant coffee.
- Management expects to fund operations and obligations through October 31, 2012 with operating cash and the credit facility. No quantified revenue or earnings guidance is provided. Management anticipates using hedges to a lesser extent as the business and revenue mix change.
Risks, contingencies, and unusual items
- Customer concentration: Green Mountain Coffee Roasters accounted for 56% of FY 2011 sales and approximately 50% of year-end receivables. Customer agreements generally lack long-term purchase commitments.
- Commodity and margin exposure: Coffee prices are volatile; the reported market price was $2.27 per pound at October 31, 2011, versus $2.04 a year earlier. Hedging losses, timing of price increases, and inability to pass costs through could pressure margins and cash flow.
- Supplier and related-party exposure: Ten suppliers accounted for 79% of purchases. A supplier whose employee was a director accounted for about $25.3 million of FY 2011 purchases.
- Credit and operating constraints: The line of credit is secured by substantially all company assets and contains minimum-working-capital and other covenants. Guarantees support financing connected with coffee-growing cooperatives and the GCC subsidiary.
- The company reported no material pending legal proceedings. Management assessed disclosure controls and internal control over financial reporting as effective; the independent auditor did not provide an internal-control attestation.
Important facts for investors to verify
- Whether the GMCR relationship and receivable concentration remain stable, and whether customer terms or purchasing levels change.
- Whether coffee-cost increases can be passed through promptly and whether hedging losses persist or materially affect margins.
- Whether working-capital needs convert into operating cash flow as sales and receivables grow.
- The final funding commitment, performance, and economics of the Global Mark investment, including the preferred-pricing benefit.
- Compliance with credit-facility covenants, renewal or continuation of the facility, and the impact of variable interest rates.
- The effect of the equity issuance and warrants on future share count and dilution.