Coffee Holding Co., Inc. — FY2016 Form 10-K
Reporting period: Fiscal year ended October 31, 2016; comparison is FY2015. The filing 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 and branded coffee, and tabletop roasting equipment.
Financial results and liquidity
| Metric | FY2016 | FY2015 |
|---|---|---|
| Net sales | $78.95 million | $118.15 million |
| Gross profit / margin | $11.88 million / about 15% | $5.72 million / about 5% |
| Operating income (loss) | $3.86 million | $(1.94) million |
| Net income (loss) attributable to Coffee Holding | $2.21 million; $0.36 per diluted share | $(1.41) million; $(0.23) per diluted share |
| Operating cash flow | $1.61 million provided | $2.29 million used |
| Cash at year-end | $3.23 million | $3.85 million |
| Working capital | $21.67 million | $21.93 million |
| Consolidated line-of-credit balance | $6.96 million | $5.55 million |
| Total assets / total liabilities | $37.02 million / $11.91 million | $35.27 million / $10.86 million |
FY2016 cost of sales was $67.07 million, about 85% of sales, versus $112.44 million, about 95%, in FY2015. Operating expenses were $8.02 million, up from $7.65 million. Interest expense was $187,000. The company reported no long-term debt; its borrowings were under revolving credit facilities. The filing reports a 37% effective tax rate for FY2016.
Operating cash flow improved year over year, but investing activities used $1.78 million, including $820,000 cash paid for Sonofresco and $963,000 of equipment purchases. Financing activities used $451,000, including $1.75 million of share repurchases and $100,000 of dividend payments. Year-end equity was $24.91 million including noncontrolling interest; Coffee Holding stockholders’ equity was $24.54 million.
Material changes versus FY2015
- Sales fell 33%, principally because wholesale transactions with the largest customer declined by approximately $41.0 million. That customer, Keurig Green Mountain (GMCR), represented 29% of FY2016 sales versus 54% in FY2015.
- Despite lower sales, gross margin rose to about 15% from 5%, reflecting improved margins in wholesale and roasted coffee and reduced hedging losses. The company recorded a net $1.06 million gain on futures and options in FY2016, compared with a net $5.48 million loss in FY2015.
- The company acquired substantially all assets of Coffee Kinetics LLC, doing business as Sonofresco, in June 2016 for $819,564 cash and 38,364 shares valued at $200,004. Sonofresco sells tabletop roasting equipment; its post-acquisition revenue included in FY2016 was $561,000.
- Purchases from Rothfos, a supplier whose employee is a company director, were approximately $8.5 million, or 13% of product purchases, compared with $22.1 million, or 21%, in FY2015.
- The company repurchased 337,269 shares for $1.75 million in FY2016, compared with 53,687 shares for $227,000 in FY2015.
Outlook, risks, and unusual items
- Management expected to fund operations, liabilities, capital expenditures, and debt payments through October 31, 2017 from operating cash flow and its credit facility. It provided no specific sales or earnings guidance.
- The company’s credit arrangements were scheduled to expire February 28, 2017. They include borrowing-base limits, collateral over company assets, and operating and financial covenants. The company reported compliance with required financial covenants at October 31, 2016.
- Commodity prices and supply are major risks. Coffee futures and options are carried at fair value, with realized and unrealized gains or losses included in cost of sales. Management said it had scaled back hedging and short-term trading; losses or ineffective hedges could pressure margins, while falling prices can also create losses.
- Customer concentration remains material despite the reduction in GMCR’s share of sales. The company generally lacks material long-term customer contracts, and the largest customer accounted for about 27% of year-end FY2015 receivables, according to the filing’s disclosure.
- Other risks include coffee-price pass-through delays, competition, supplier and shipping disruption, dependence on key executives, acquisition integration, and reliance on the Colorado facility. The company reported routine litigation only and no material off-balance-sheet arrangements.
- Management concluded disclosure controls and internal control over financial reporting were effective as of October 31, 2016. The auditor gave an unqualified opinion on the financial statements; the auditor did not attest to internal control effectiveness.
Important facts for investors to verify
- Whether the February 2017 credit facilities were renewed, and their current capacity, pricing, covenants, and outstanding balances.
- Whether the decline in GMCR sales continued and how customer concentration and receivables exposure have changed.
- Whether improved FY2016 margins are sustainable, separating underlying product economics from futures and options gains.
- Sonofresco’s subsequent contribution to revenue, profit, and cash flow, and any integration or purchase-price risks.
- The filing gives differing descriptions of credit-facility capacity: a $9 million company facility plus a separate $3 million OPTCO facility, while the market-risk section refers to a $12 million maximum. Confirm the applicable consolidated borrowing limits and terms.
- Confirm the distinction between $2.35 million consolidated net income before noncontrolling interest and $2.21 million attributable to Coffee Holding, and reconcile reported equity figures where needed.