Coffee Holding Co., Inc. — Q1 FY2016 10-Q
Reporting period: Three months ended January 31, 2016; balance-sheet comparisons are against October 31, 2015. Coffee Holding is a wholesale coffee business spanning green coffee, private-label coffee, and branded products. Results are unaudited.
Financial performance
| Metric | Q1 FY2016 | Q1 FY2015 | Change |
|---|---|---|---|
| Net sales | $22.81 million | $38.41 million | Down $15.60 million (40.6%) |
| Gross profit / margin | $2.65 million / 11.62% | $1.92 million / 5.0% | Profit up $0.73 million; margin improved |
| Operating income | $810,239 | $102,352 | Up $707,887 |
| Net income attributable to Coffee Holding | $439,569 | $71,801 | Up $367,768 |
| Basic and diluted EPS | $0.07 | $0.01 | Increased |
| Operating cash flow | $3.79 million | Used $3.14 million | Improved by $6.93 million |
Operating expenses were $1.84 million, compared with $1.82 million. Other expense was $30,247, versus $44,967. The income-tax provision was $302,564, compared with a $31,104 benefit. Cash at quarter-end was $5.93 million, up from $3.85 million at October 31, 2015. Investing activities used $214,930; financing activities used $1.50 million, including $1.40 million of net line-of-credit repayments and a $100,000 dividend.
Liquidity, debt, and financial position
- Working capital was $22.25 million, up from $21.93 million at October 31, 2015. Current assets were $32.06 million and current liabilities were $9.82 million.
- Inventories were $11.88 million, down from $13.86 million; accounts receivable was $11.27 million.
- Reported line-of-credit borrowings totaled $4.15 million, down from $5.55 million. The filing describes balances of $2.32 million on the company facility and $1.84 million on the OPTCO facility. Debt bears variable interest at the Wall Street Journal Prime Rate, reported as 3.25%, and is secured by company assets.
- Total liabilities were $10.60 million and total equity was $24.80 million, including $24.52 million attributable to Coffee Holding stockholders.
- The company reported compliance with its credit-facility covenants at January 31, 2016. Facilities were scheduled to terminate February 28, 2017.
Material changes and management commentary
Sales declined mainly because of lower coffee prices and approximately $15.54 million less in wholesale transactions with Keurig Green Mountain. Management attributed higher gross profit and margin to improved margins in wholesale and roasted coffee and reduced quarter-over-quarter hedging losses. Selling and administrative costs were nearly flat.
Net cash from operations improved principally through inventory reduction and higher accounts payable and accrued expenses, as well as net income and deferred-tax effects. Commodity contracts generated a reported net loss of $410,222 for the quarter, compared with a $1.70 million loss in the prior-year quarter. The company held futures contracts to purchase 3.75 million pounds of green coffee at a weighted average $1.19 per pound; the filing reported a market price of $1.16 per pound.
Outlook, risks, and other notable items
- No specific revenue or earnings guidance was provided. Management expected to fund operations, liabilities, capital expenditures, and debt payments through January 31, 2017 using operating cash flow and its credit facility; additional borrowing capacity depends on eligible receivables and inventory.
- Management said it was scaling back futures and options trading and expected to use hedging in a limited capacity. Hedging can increase earnings volatility, and losses, coffee-price changes, supply disruptions, or counterparty nonperformance could pressure costs and margins.
- Customer concentration remains material: one customer represented approximately 38% of sales and $3.94 million of receivables in the quarter, compared with approximately 65% of sales and $14.73 million of receivables in the prior-year quarter. Four vendors accounted for approximately 52% of purchases.
- Purchases from a vendor whose employee is a company director were approximately $3.53 million. The company also reported $75,018 of processing expenses paid to its 40% joint-venture partner.
- The quarter-end balance sheet included a $613,438 refund receivable and a $376,973 deferred tax asset; management noted the deferred tax asset could require a valuation allowance if taxable income is not generated.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. The filing reported no material risk-factor changes, no material pending legal proceedings beyond routine litigation, and no material off-balance-sheet arrangements.
Important facts for investors to verify
- Whether the lower sales level reflects persistent reduced Keurig Green Mountain business or primarily coffee-price and transaction timing effects.
- Whether improved gross margin can be sustained as coffee prices, hedging positions, and product mix change.
- The identity and ongoing exposure to the concentrated customer, including collections of its receivable balance.
- Availability and covenant terms of the secured credit facilities, their February 2017 expiration, and the company’s refinancing or repayment plans.
- Recoverability of the deferred tax asset and refund receivable, and the valuation of inventory and commodity positions.