Coffee Holding Co., Inc. — Q1 FY2014 Form 10-Q
Reporting period: Three months ended January 31, 2014; comparisons are with the three months ended January 31, 2013. Coffee Holding is a wholesale coffee business spanning green coffee, private-label coffee, and branded coffee, reported as one segment. Financial statements are unaudited.
Key financial results
| Metric | Q1 FY2014 | Q1 FY2013 | Change |
|---|---|---|---|
| Net sales | $27.35 million | $31.32 million | Down 13% |
| Gross profit | $4.12 million | $3.68 million | Up $436,000 |
| Gross margin | 15.1% | 11.8% | Up 3.3 percentage points |
| Income from operations | $2.25 million | $1.79 million | Up $461,000 |
| Net income attributable to Coffee Holding | $1.37 million | $938,000 | Up 46% |
| Diluted EPS | $0.21 | $0.14 | Up $0.07 |
| Cash provided by operating activities | $1.85 million | $536,000 | Up $1.31 million |
Operating expenses were $1.87 million, down 1.3%. Cash increased by $497,000 to $4.53 million during the quarter. At January 31, 2014, working capital was $20.85 million, total liabilities were $6.09 million, and stockholders’ equity attributable to Coffee Holding was $23.12 million. The company had no line-of-credit borrowings, compared with $1.23 million at October 31, 2013. Its revolving facility had a stated maximum of $7 million and was secured by company assets; the filing reports covenant compliance.
Material changes and drivers
- Sales fell by $3.97 million as coffee prices declined to a seven-year low, partly offset by a 13.7% increase in pounds of green coffee sold. Management attributed the shift to increased green-coffee sales and lower private-label sales.
- Gross margin improved primarily because of lower green-coffee purchase costs and gains from hedging activity. Commodity contracts produced a reported net gain of $1.03 million for the quarter, including $1.18 million of unrealized gains. These gains are recognized in earnings and can make results volatile.
- Operating cash flow improved year over year. Receivables and inventory declined, while accounts payable and accrued expenses also fell. Investing used $124,000, principally for equipment purchases; financing used $1.23 million, principally to repay the line of credit.
- No dividend was declared for the quarter; the prior-year quarter included a $0.06-per-share dividend. A January 2014 authorization permits repurchases of up to $1 million of common stock, but no shares had been repurchased by January 31.
Outlook, risks, and other matters
The company provided no specific financial guidance. Management expected to fund operations, liabilities, capital expenditures, and debt payments through October 31, 2014 with operating cash flow and, if needed, the credit facility. Management cautioned that interim results are not necessarily indicative of full-year results.
- Customer concentration is significant: one customer generated approximately 55% of quarterly sales and represented about $4.08 million of receivables at January 31, 2014.
- Coffee-price volatility, hedge effectiveness, and possible counterparty nonperformance may affect costs, margins, and earnings. At quarter-end, the company held 47 coffee futures contracts covering 1,762,500 pounds.
- Four vendors accounted for approximately 61% of quarterly purchases. Management said alternative suppliers were available.
- The credit facility includes financial and operating covenants and requires minimum working capital; the company reported compliance. Management identified no material off-balance-sheet arrangements and no material changes to previously disclosed risk factors.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. The company disclosed no material pending legal proceedings beyond routine litigation.
Important facts for investors to verify
- Whether improved margins and earnings persist without the quarter’s substantial unrealized commodity gains.
- How lower coffee prices and the shift in sales mix affect revenue, volumes, and profitability in subsequent quarters.
- The financial exposure to the largest customer and the collectibility of its receivable balance.
- Availability and terms of the revolving credit facility, covenant headroom, and future working-capital needs.
- Whether the authorized share-repurchase program is used and whether any dividend policy changes.