Coffee Holding Co., Inc. — Q1 FY2015 Form 10-Q
Reporting period: Three months ended January 31, 2015; balance-sheet comparisons are to October 31, 2014. The company roasts, packages and distributes private-label and branded coffee and sells wholesale green coffee. The interim financial statements are unaudited.
Financial results
| Metric | Q1 FY2015 | Q1 FY2014 / comparison |
|---|---|---|
| Net sales | $38.41 million | $27.35 million; up 40% |
| Gross profit | $1.92 million; 5.0% margin | $4.12 million; 15.1% margin |
| Operating income | $102,352 | $2.25 million |
| Net income attributable to Coffee Holding | $71,801; $0.01 per basic and diluted share | $1.37 million; $0.22 basic, $0.21 diluted |
| Operating cash flow | $(3.14) million | $1.85 million provided |
| Cash at period end | $3.52 million | $4.53 million at January 31, 2014 |
| Working capital | $23.58 million | $23.48 million at October 31, 2014 |
| Line of credit outstanding | $5.50 million | $2.50 million at October 31, 2014 |
Cost of sales was $36.48 million, or 95.0% of sales, versus 84.9% a year earlier. Operating expenses declined 2.7% to $1.82 million. Interest expense rose to $53,979 from $18,088. The company reported a $31,104 income-tax benefit, compared with an $825,925 provision in Q1 FY2014. Total assets were $43.17 million and total liabilities were $17.11 million at January 31, 2015.
Material changes and drivers
- Sales increased on higher green and roasted coffee volumes and higher coffee prices, but gross profit fell by $2.20 million and gross margin contracted by about 10 percentage points.
- Management attributed the margin and earnings decline mainly to higher green-coffee costs and hedging results: a $1.70 million net realized and unrealized loss on commodity contracts in Q1 FY2015, versus a $1.03 million net gain in Q1 FY2014. The filing identifies a $1.36 million unrealized loss in the current quarter.
- Operating cash use reflected lower earnings and a $5.88 million increase in accounts receivable, partly offset by inventory reductions of $1.65 million. Financing provided $2.92 million, principally from net borrowings; investing used $38,473.
- Accounts receivable rose to $21.30 million from $15.42 million at October 31, 2014. Inventory declined to $13.56 million from $15.21 million. The line-of-credit balance increased by $3.00 million.
Liquidity, outlook, and risks
The revolving credit facility is secured by company assets, subject to borrowing-base limits and financial and operational covenants; the company reported covenant compliance at January 31, 2015. Its term was extended on February 12, 2015 to March 31, 2015. Management said it was negotiating a longer extension and expected to finalize one before that date, but cautioned that extension was not assured. Management expected existing working capital and the facility to fund needs for the next twelve months; without an extension, additional financing or spending reductions might be needed, and financing availability and terms were uncertain.
A single customer generated approximately 65% of Q1 FY2015 sales and represented about $14.73 million of receivables at January 31, 2015, up from 55% of sales and $4.08 million of receivables in the comparable prior-year quarter. Four vendors supplied approximately 64% of purchases. Related-party purchases from a vendor whose employee is a company director were approximately $9.8 million, versus $5.0 million a year earlier.
Coffee-price volatility and the effectiveness of futures and options hedges are key risks; the contracts are not designated as accounting hedges, so fair-value changes affect current earnings. The company also cites customer retention, competition, supply, financing, covenant compliance, and its Colorado facility among forward-looking risks. No material change to the prior annual report’s risk factors was reported. Management stated that disclosure controls were effective and reported no material control changes or material pending litigation beyond routine matters.
Most important facts for investors to verify
- Whether Sterling extended the credit facility beyond March 31, 2015, and the resulting borrowing terms and covenant headroom.
- Whether the unusually high customer concentration and receivable balance are collectible and sustainable.
- How much of the margin decline arose from coffee costs, product mix, and hedging losses, and whether subsequent hedge results reversed or continued the trend.
- Whether operating cash flow improves as receivables are collected and whether borrowing needs remain elevated.
- The filing reports consolidated net income before noncontrolling interest of $88,489 in the income statement, while the cash-flow statement lists net income of $88,489; investors should distinguish these from the $71,801 attributable to Coffee Holding.