Coffee Holding Co., Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended July 31, 2011; balance-sheet comparisons are with October 31, 2010. The company is a wholesale coffee roaster and dealer, selling green coffee, private-label coffee, and its own branded products. Results include OPTCO, acquired in May 2010, and the company’s 60%-owned Generations Coffee Company.
Financial performance
| Metric | Three months ended July 31, 2011 | Three months ended July 31, 2010 | Nine months ended July 31, 2011 | Nine months ended July 31, 2010 |
|---|---|---|---|---|
| Net sales | $35.76 million | $19.03 million | $98.74 million | $60.31 million |
| Gross profit | $2.09 million | $2.46 million | $8.77 million | $7.65 million |
| Gross margin | 5.9% | 12.9% | 8.9% | 12.7% |
| Operating income | $340,436 | $783,052 | $3.55 million | $3.10 million |
| Net income attributable to Coffee Holding | $168,236 | $424,091 | $2.40 million | $1.78 million |
| Basic and diluted EPS | $0.03 | $0.08 | $0.44 | $0.33 |
Nine-month operating cash flow was negative $1.39 million, versus positive $260,355 in 2010. Investing activities used $419,212; financing activities provided $3.90 million. Cash increased by $2.10 million to $3.77 million, with the increase supported by net borrowing under the revolving credit facility.
At July 31, 2011, working capital was $12.95 million and total equity was $15.45 million. Current assets were $32.07 million and current liabilities $19.12 million. The line-of-credit balance was $6.71 million, up from $2.31 million at October 31, 2010. The facility had a stated $7 million limit, was secured by substantially all company assets, and carried a variable rate based on a 5% reference rate plus 1%. The company reported compliance with its financial covenants.
Material changes and key drivers
- Nine-month sales rose 64%; third-quarter sales rose 88%. Management attributed growth to higher selling prices, increased volumes, OPTCO, and additional sales to major customers. The acquisition affects comparability with 2010.
- Gross margin contracted materially as green coffee costs rose, green coffee represented a greater share of sales than roasted coffee, and commodity-option losses affected cost of sales.
- Third-quarter net income fell to $168,236, principally reflecting $1.20 million of unrealized option losses marked to market. The filing reports a $1.45 million combined realized and unrealized net commodity-contract loss for the quarter. For the nine months, the reported combined net result on those contracts was a $448,571 gain.
- Receivables increased $4.26 million and inventory increased $4.93 million from October 31, 2010, contributing to negative operating cash flow. Inventory was $13.13 million, primarily green coffee.
- The company declared dividends of $0.03 per share in each of three quarters, totaling $0.09 per share for the nine-month period; cash dividends paid were $500,967.
- The OPTCO business met its first profit target: a $50,000 supplemental cash payment was made in the quarter and 5,000 additional shares were issued on August 9, 2011. A further 5,000-share payment may depend on meeting the next profit target for May 2011–April 2012.
- The Entenmann’s coffee license expired in March 2011; remaining product could be sold through June, after which remaining packaging liability was disposed of at company cost.
Outlook, risks, and other disclosures
Management expected to fund the next 12 months’ working capital, operations, capital expenditures, and debt payments with cash on hand, operating cash flow, and credit-facility borrowings, while also seeking capital to support growth. It cautioned that additional financing may not be available on acceptable terms or at all. The filing provides no specific revenue, earnings, or margin guidance.
- Customer concentration is significant: one customer, identified in the risk discussion as Green Mountain Coffee Roasters, accounted for approximately 54% of nine-month sales and about $4.9 million of receivables at July 31, 2011. The company generally has no long-term customer contracts.
- Coffee-price, supply, and hedging risks are material. Derivative contracts are not designated as accounting hedges, and mark-to-market gains and losses can increase earnings volatility. The company held options covering 3.75 million pounds at $2.40 per pound at quarter-end and reported no futures contracts held then.
- Other risks include dependence on a single commodity, competitive pressure, customer retention, variable-rate debt and covenant restrictions, reliance on key personnel and production facilities, and the ability to obtain financing. Management cited the risk that green coffee price increases may not be passed on promptly or fully.
- The company reported no material off-balance-sheet arrangements and no pending legal proceedings other than routine litigation. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the company can sustain sales growth while recovering gross margins after the sharp third-quarter contraction.
- Customer concentration, particularly the largest customer’s sales and receivable exposure, and the absence of long-term contracts.
- Commodity-option positions, valuation and accounting: the filing reports a $1.20 million third-quarter unrealized loss and a $879,058 net commodity position liability at July 31; it separately describes the fair value of the options, so the reported figures and their presentation merit reconciliation.
- Working-capital needs, inventory and receivable growth, cash conversion, and headroom under the $7 million credit facility and its covenants.
- The outcome of OPTCO’s next profit target and any related share issuance, and the financial effect of the expired Entenmann’s license.
- Share-count disclosures: the cover page reports 5,495,823 shares outstanding at September 8, 2011, while the balance sheet reports 5,490,823 outstanding at July 31, 2011.