Coffee Holding Co., Inc. — Form 10-Q Summary
Business context and reporting period
The filing covers the three months ended January 31, 2019, the first quarter of fiscal 2019, compared with the three months ended January 31, 2018. Coffee Holding is a wholesale coffee roaster and dealer, selling green coffee, private-label and branded packaged coffee, and coffee roasting equipment. It reports one operating segment. Current-period results include Steep & Brew, acquired through its 60%-owned joint venture; the comparable reported 2018 results do not.
Financial results and liquidity
| Metric | Q1 FY2019 | Q1 FY2018 | Change |
|---|---|---|---|
| Net sales | $23.63 million | $22.08 million | +7.0% |
| Gross profit / margin | $4.57 million / 19.3% | $3.80 million / 17.2% | Profit +20.4%; margin +2.1 percentage points |
| Operating income | $690,037 | $888,626 | −22.4% |
| Net income attributable to Coffee Holding | $314,715 | $431,387 | −27.0% |
| Basic and diluted EPS | $0.06 | $0.07 | Down $0.01 |
| Net cash from operating activities | $812,507 | $406,423 | More than doubled |
At January 31, 2019, cash was $4.80 million, working capital was $19.90 million, and total assets were $38.32 million. The revolving line of credit balance was $5.77 million, down from $6.26 million at October 31, 2018; the facility maximum is $14 million, bears interest at LIBOR plus 2% (4.5% at quarter-end), matures March 31, 2020, and is secured by company assets. The company reported compliance with its covenants. Operating cash flow was partly offset by $133,511 of capital expenditures and $492,574 of net financing outflows; cash increased $186,422 during the quarter.
Changes versus the prior comparable period
- Sales increased by $1.55 million. Packaged coffee revenue rose to $14.48 million from $11.24 million, while green coffee revenue fell to $9.16 million from $10.85 million.
- Gross margin improved, which management attributed to better margins in wholesale and roasted coffee. Cost of sales was 80.7% of sales versus 82.8%; management cited lower green coffee costs, partly offset by higher steel-can costs associated with tariffs.
- Operating expenses rose 33.4% to $3.88 million. Selling and administrative expense increased 34.3%, with management citing Steep & Brew and higher freight costs as distribution expanded.
- Operating income and net income attributable to the company declined despite higher sales and gross profit. The filing’s MD&A statement that net income increased conflicts with the reported financial statements; the statements show a decline from $431,387 to $314,715.
- Reported Q1 FY2018 sales were $22.08 million; the filing also gives unaudited pro forma Q1 FY2018 sales of $25.14 million as if the Steep & Brew acquisition had occurred earlier. These figures are not directly comparable without accounting for the acquisition timing.
Outlook, commentary, risks and unusual items
- No specific sales or earnings guidance was provided. Management said it expects to fund operations, liabilities, capital expenditures and debt payments through March 14, 2020 using operating cash flow and the credit facility.
- The company intends to pay shareholders a dividend equal to 30% of fiscal 2019 net profits, with shareholders of record on October 31, 2019 and anticipated payment in the second fiscal quarter of 2020. The bank waived the relevant restriction for this plan; payment remains an intention, not a completed distribution.
- Coffee price and supply volatility, hedging effectiveness, customer retention, competition, freight and input costs, and financing-covenant compliance are among the disclosed risks. The company said it is scaling back hedging and short-term futures/options trading and expects to use them in a limited capacity.
- Commodity contracts generated a net loss of $310,166 for the quarter, including a $543,149 unrealized loss. At January 31, contracts covered purchases of 3.0 million pounds of coffee futures and options on 1.125 million pounds. These instruments are not designated accounting hedges, so fair-value changes affect earnings.
- Five customers represented approximately 21% of quarterly sales and $2.5 million of receivables at quarter-end. Five vendors represented approximately 30% of purchases. Purchases from a vendor whose employee is a company director were approximately $1.80 million.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. The company disclosed no material change in risk factors, no defaults on senior securities, and only routine business litigation.
Important facts for investors to verify
- Whether margin improvement persists and offsets rising freight, packaging and operating expenses.
- How much reported sales growth and expenses reflect Steep & Brew, and how performance compares with the pro forma prior-year figures.
- Subsequent commodity-contract results and the effect of unrealized gains or losses on reported earnings and cash requirements.
- Availability under the asset-based credit facility, future borrowing needs, covenant compliance, and the ability to refinance or repay before the March 31, 2020 maturity.
- Whether the proposed dividend is ultimately declared and paid, and how it affects liquidity and financing-covenant capacity.
- Customer and vendor concentration, related-party purchasing terms, and the accuracy of the MD&A net-income comparison discrepancy.