Coffee Holding Co., Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended July 31, 2018. The unaudited results consolidate the Company and subsidiaries, including Generations Coffee Company (GCC), in which Coffee Holding owns 60%.
Business context and financial performance
The Company roasts, markets and distributes private-label and branded coffee, sells wholesale green coffee, and sells coffee-roasting equipment. It reports one operating segment.
| Metric | Three months ended July 31, 2018 | Nine months ended July 31, 2018 |
|---|---|---|
| Net sales | $23.44 million, up 30.4% | $67.72 million, up 22.2% |
| Gross profit / margin | $3.79 million / 16.2% | $11.45 million / 16.9% |
| Operating income | $268,675 | $2.04 million |
| Net income attributable to Coffee Holding | $15,690; $0.00 per diluted share | $957,926; $0.17 per diluted share |
| Net cash provided by operations | Not presented separately | $7.95 million |
For the nine-month period, cost of sales was $56.26 million (83.1% of sales); interest expense was $286,555. At July 31, cash was $5.08 million, working capital was $19.34 million, and total liabilities were $12.19 million. The revolving credit balance was $7.15 million, down from $8.41 million at October 31, 2017. The $14 million facility bears variable interest at LIBOR plus 2% under a March 2018 modification, matures March 31, 2020, and is secured by Company assets. The filing cites a rate of approximately 3.9%.
Changes versus comparable periods
- Third-quarter sales rose $5.46 million; about $2.83 million came from Steep & Brew, acquired by GCC in April 2018. Management reported organic growth of 14.6%. Nine-month sales rose $12.32 million, including approximately $2.98 million from the acquisition; reported organic growth was 16.8%.
- Third-quarter gross margin declined from 17.1% to 16.2%, which management attributed to higher freight and shipping costs, integration of Steep & Brew, coffee-market changes, and approximately $1.17 million of unrealized hedging losses. Nine-month gross margin improved from 16.1% to 16.9%.
- Third-quarter net income attributable to Coffee Holding fell from $32,800 to $15,690 despite higher sales. Nine-month attributable net income increased from $410,319 to $957,926.
- Nine-month operating cash flow increased from $2.51 million to $7.95 million, supported principally by lower receivables and inventory. Investing used $3.04 million, including $2.74 million paid for Steep & Brew; financing used $2.15 million, including line-of-credit repayments and share repurchases.
Outlook, risks and unusual items
- No quantified earnings or sales guidance is provided. Management expects to fund operations, liabilities, capital expenditures and debt payments through July 31, 2019 with operating cash flow and the credit facility.
- Management says coffee prices and supply are volatile and the Company is reducing its use of hedging and short-term futures/options trading, while continuing limited hedging and longer-term futures purchases. Derivatives are not designated as accounting hedges; gains and losses affect earnings and can increase volatility. At July 31, the Company held futures to purchase 4.91 million pounds at a weighted average $1.159 per pound; stated market price was $1.099.
- Customer concentration is meaningful: five customers generated approximately 27% of nine-month sales. A vendor-related party is also a director; purchases from that vendor were approximately $6.99 million for the nine months.
- Steep & Brew acquisition accounting remained provisional, including the allocation of acquisition cost and goodwill. The $150,000 seller note is payable in two $75,000 installments, due October 2018 and April 2019.
- The credit agreement includes minimum working-capital and year-end net-profit requirements and other operating covenants. The filing does not clearly state whether all covenants were met at July 31.
- The filing reports no material risk-factor changes, no material pending legal proceedings, and no material off-balance-sheet arrangements. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the Steep & Brew acquisition’s provisional asset values and goodwill allocation were finalized, and how the acquisition performs after integration.
- Compliance with credit-facility covenants, borrowing-base availability, and the effect of variable interest rates on financing costs.
- Future coffee-price exposure, hedge results and margin trends, particularly after the reported third-quarter mark-to-market losses.
- The sustainability of operating cash flow and customer concentration, including collections and customer retention.
- Share-repurchase disclosures: the filing reports 81,575 shares repurchased during the quarter and 185,168 during the nine months; confirm the reported figures and remaining program authorization against the detailed table.
- The income-tax provision is stated as $35,721 in the financial statements for the quarter, while MD&A gives a different prior-year quarterly tax figure than the financial statements; verify the comparative tax amount.