Coffee Holding Co., Inc. — Form 10-Q Summary
Reporting period: Three and six months ended April 30, 2019. The company is an integrated coffee roaster and wholesaler, selling green coffee, private-label and branded coffee, and roasting equipment. It reports one operating segment.
Financial performance
| Metric | Three months ended April 30, 2019 | Six months ended April 30, 2019 |
|---|---|---|
| Net sales | $20.72 million | $44.35 million |
| Gross profit / margin | $3.54 million / 17.1% | $8.11 million / 18.3% |
| Operating income (loss) | ($92,742) | $597,292 |
| Net income (loss) attributable to Coffee Holding / diluted EPS | ($238,468) / ($0.04) | $76,247 / $0.01 |
| Net cash from (used in) operating activities | Not presented separately | ($598,440) |
For the six-month cash-flow statement, net income before noncontrolling interest was $391,106. Cash at April 30 was $3.16 million, versus $4.61 million at October 31, 2018. Working capital was $19.75 million. Current assets were $29.06 million and current liabilities were $9.31 million.
The revolving line of credit balance was $5.77 million, down from $6.26 million at October 31, 2018. The facility has a $14 million maximum, matures March 31, 2020, bears variable interest at 4.48% at April 30, 2019, and is secured by company assets. The company reported compliance with its loan covenants.
Changes versus the prior comparable periods
- Three months: Sales declined 7% from $22.19 million. Gross profit fell from $3.87 million and gross margin eased from 17.4%; the company moved from $863,486 operating income and $510,849 attributable net income to operating and net losses.
- Six months: Sales were essentially flat versus $44.28 million. Gross profit increased from $7.66 million and margin improved from 17.3%, but operating income fell from $1.75 million and attributable net income declined from $942,236.
- Management cited lower coffee selling prices and about $2 million less sales to a former major wholesale green-coffee customer. Six-month sales gains in branded and private-label coffee and integration of Steep & Brew partly offset that decline and lower sales to Sears following its bankruptcy.
- Operating expenses rose, primarily from Steep & Brew integration and higher freight/distribution costs. Higher steel-can costs, trucking costs, and hedge losses also pressured quarterly gross profit.
Outlook, risks, and notable items
- Management said it expects to fund operations, liabilities, capital expenditures, and debt payments through June 15, 2020 using operating cash flow and the credit facility. No specific revenue or earnings guidance was provided.
- The company intends to pay shareholders a dividend equal to 30% of fiscal 2019 net profits, with payment expected in fiscal 2020’s second quarter to shareholders of record October 31, 2019. It obtained a waiver from Sterling National Bank for the plan.
- Commodity derivatives created substantial earnings volatility: six-month realized and unrealized net losses were $1.86 million, compared with net gains of $160,073 in the prior-year period. Management said it is scaling back hedging and short-term trading and expects to continue using them only in a limited capacity.
- Key risks include coffee-price and supply volatility, hedge effectiveness, competition, customer retention, financing and covenant compliance, and customer concentration. Five customers represented about 21% of six-month sales; five vendors represented about 28% of six-month purchases.
- Management reported a material weakness in internal control over financial reporting related to accounting for stock-based compensation awards; disclosure controls were deemed ineffective as of April 30, 2019. The company was developing a remediation plan and warned that unresolved weaknesses could lead to misstatements or a restatement.
- The company granted 689,000 stock options at $5.43 per share during the six months, including options to officers and directors; approximately $1.73 million of stock-compensation expense remained outstanding at April 30. No material subsequent events or non-routine pending legal proceedings were reported.
Key facts for investors to verify
- Whether the stock-compensation accounting weakness is remediated and whether any financial-statement adjustments are needed.
- Whether operating cash flow improves and the company maintains adequate borrowing availability and covenant compliance ahead of the March 2020 facility maturity.
- How coffee futures/options losses, coffee prices, steel and freight costs affect margins, and whether the reduced hedging approach limits volatility.
- Whether sales lost from the former large green-coffee customer and Sears are replaced, and how customer and vendor concentration evolves.
- Whether the proposed dividend is paid and remains consistent with earnings, cash needs, and lender requirements.