Coffee Holding Co., Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended October 31, 2018. This annual filing reports full-year results; it does not provide standalone fourth-quarter financial results.
Business context
Coffee Holding is an integrated U.S. coffee roaster and dealer selling wholesale green coffee, private-label and branded coffee, and tabletop roasting equipment. It operates as one reporting segment. In April 2018, Generations Coffee Company, an entity formed through the Company’s joint venture with Caruso’s Coffee, acquired substantially all assets of Steep & Brew. The Company included Steep & Brew’s results from the acquisition date.
Key financial results
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Net sales | $90.7 million | $77.1 million | +17.5% |
| Gross profit / margin | $15.6 million / 17.2% | $12.1 million / 15.8% | Margin +1.4 percentage points |
| Operating income | $2.4 million | $1.2 million | Higher |
| Net income attributable to Coffee Holding | $1.06 million; $0.19 per share | $0.47 million; $0.08 per share | Higher |
| Net cash from operating activities | $8.69 million | $1.48 million | Higher |
| Cash and cash equivalents | $4.61 million | $2.33 million | Higher |
| Line of credit balance | $6.26 million | $8.41 million | Lower |
Consolidated net income before noncontrolling interest was $1.53 million in FY2018 versus $0.73 million in FY2017; $468,130 of FY2018 income was attributable to noncontrolling interests. Working capital was $19.57 million, down from $20.27 million. Total assets were $38.83 million and total liabilities were $12.84 million at year-end.
Investing activities used $3.06 million, including $2.68 million paid for the Steep & Brew acquisition. Financing activities used $3.35 million, including $1.13 million for share repurchases and net principal reductions on the line of credit. FY2018 operating cash flow benefited from collections and lower inventory, among other working-capital movements.
Changes and unusual items
- Sales rose $13.53 million; management attributed $5.51 million to Steep & Brew and reported organic growth of $8.01 million, or 10.4%.
- Gross profit increased $3.46 million. Management attributed approximately $2.11 million of the increase to Steep & Brew and cited improved margins in wholesale and roasted coffee despite higher freight costs.
- Operating expenses increased $2.29 million, largely reflecting Steep & Brew and expanded distribution and freight costs. Interest expense rose to $371,000 from $264,000.
- Net realized and unrealized losses on coffee futures and options were $819,335, recorded in cost of sales, versus net losses of $326,802 in FY2017. The Company says it has scaled back hedging and short-term futures trading and expects to continue such activity in limited capacity.
- The March 2018 credit modification extended maturity to March 31, 2020, increased the maximum facility to $14 million and set interest at LIBOR plus 2% (4.3% at October 31, 2018). The facility is secured by Company assets and includes financial and operational covenants.
- The Company repurchased 236,586 shares for $1.13 million. It does not currently pay cash dividends but intends to pay a dividend equal to 30% of FY2019 net profits, if any, to shareholders of record October 31, 2019; payment was expected in FY2020 Q2 and is not assured.
Outlook, risks and other disclosures
Management expected to fund operations, liabilities, capital expenditures and debt payments through October 31, 2019 using operating cash flow and the credit facility, and anticipated higher operating cash flow from a full year of Steep & Brew. This is not quantified earnings guidance. The filing identifies risks from coffee-price and supply volatility, hedging losses, limited ability to pass cost increases to customers, competition, customer concentration, acquisition integration, variable-rate debt and covenant compliance, and reliance on key personnel and shipping providers.
GMCR accounted for approximately 10% of FY2018 sales. Five customers represented approximately 26% of sales. Five suppliers accounted for approximately 26% of green-coffee purchases; Rothfos, whose employee is a Company director, supplied approximately $9.1 million, or 13%, of total product purchases. The Company reported no material pending litigation beyond routine matters and no material off-balance-sheet arrangements. The independent auditor issued an unmodified 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.
Investor verification points
- Assess whether organic sales growth and improved gross margin can persist after separating acquisition contribution and changes in coffee and freight costs.
- Review the financial impact and final purchase-price allocation of Steep & Brew; the filing says acquisition accounting was still provisional.
- Check future coffee-hedge results, exposure to commodity-price movements and the effect of reduced hedging activity.
- Monitor borrowing-base availability, covenant compliance, variable-rate interest exposure and the ability to maintain working capital and required profitability.
- Evaluate reliance on major customers and suppliers, including the related-party supplier relationship, and whether the proposed FY2019 dividend is permitted and supported by actual profits.