Coffee Holding Co., Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended April 30, 2016. The company is a wholesale coffee roaster and dealer, selling green, private-label, and branded coffee. Results are unaudited.
Financial performance
| Metric | Three months ended April 30, 2016 | Six months ended April 30, 2016 |
|---|---|---|
| Net sales | $21.41 million | $44.21 million |
| Gross profit / margin | $3.31 million / 15.5% | $5.96 million / 13.5% |
| Operating income | $1.36 million | $2.17 million |
| Net income attributable to Coffee Holding | $830,801; $0.14 per diluted share | $1.27 million; $0.21 per diluted share |
| Operating cash flow | Six-month period: $3.00 million provided |
For the six months, investing activities used $270,221 and financing activities used $3.39 million. Cash declined $655,719 to $3.20 million. Six-month interest expense was $73,473.
Liquidity, debt, and balance sheet
Working capital was $22.73 million at April 30, up $797,450 from October 31, 2015. Current assets were $28.66 million and current liabilities $5.93 million. Total assets were $31.92 million; total liabilities were $6.66 million. The balance sheet reports $2.65 million outstanding on the line of credit, down from $5.55 million at fiscal year-end. The filing breaks the April balance into $817,121 on the company facility and $1.84 million on OPTCO’s facility, which the company guarantees. Borrowing rates are variable at the Wall Street Journal Prime Rate; the company reported compliance with its financial covenants.
Changes versus prior year
- Second-quarter sales fell 29.3%; six-month sales fell 35.3%. Management attributed the declines to lower coffee prices and reduced wholesale transactions with Keurig Green Mountain, approximately $8.16 million lower in the quarter and $28.33 million lower for six months.
- Gross margin improved from negative 3.6% to 15.5% in the quarter, and from 1.2% to 13.5% for six months. Management cited improved wholesale and roasted-business margins and smaller period-over-period hedging losses.
- The company moved from a second-quarter net loss of $2.05 million and six-month net loss of $1.98 million in 2015 to net income in both 2016 periods. Six-month operating cash flow also improved from $3.02 million used to $3.00 million provided.
Outlook, risks, and notable items
- Management expects to fund operations, liabilities, capital expenditures, and debt payments through April 30, 2017 using operating cash flow and its credit facility; increased eligible receivables or inventory could support additional borrowing. No earnings or revenue guidance was provided.
- Customer concentration remains material: one customer generated about 37% of six-month sales and represented approximately $5.12 million of receivables at April 30. Four vendors represented about 56% of six-month purchases.
- Coffee-price volatility and hedging are key risks. The company is scaling back hedging and short-term futures/options trading, but continues limited use. Derivative gains and losses are recognized in earnings; six-month commodity-contract gains totaled $353,872, compared with losses of $5.05 million in the prior-year period.
- At April 30, the company held 50 futures contracts for 1.875 million pounds of green coffee, at a weighted-average contract price of $1.243 per pound. Management warns that hedges may not offset price changes and may cause losses or expose the company to counterparty and supply risks.
- The company repurchased 94,088 shares for $386,319 during the quarter. It reported no material legal proceedings, no material changes to previously disclosed risk factors, and no subsequent events requiring disclosure.
Key facts for investors to verify
- Whether lower sales to Keurig Green Mountain and customer concentration persist, and how they affect revenue and receivables.
- Whether improved gross margins continue as coffee prices and hedging results change.
- Available borrowing capacity, the separate company and OPTCO facility balances, and the February 2017 facility expiration.
- Cash generation and the sustainability of management’s stated funding outlook through April 2017.
- Potential effects of commodity exposure, inventory valuation, and the $53,595 net deferred tax asset.