Coffee Holding Co., Inc. — Q1 FY2013 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended January 31, 2013, compared with the three months ended January 31, 2012. Coffee Holding roasts, blends, packages and distributes coffee, and sells wholesale green coffee. It reports one operating segment.
Financial performance and position
| Metric | Q1 FY2013 | Q1 FY2012 / prior balance-sheet date |
|---|---|---|
| Net sales | $31.32 million | $56.60 million |
| Gross profit / margin | $3.68 million / 11.76% | $4.45 million / 7.86% |
| Operating income | $1.79 million | $2.62 million |
| Net income attributable to Coffee Holding | $937,537; $0.15 basic and $0.14 diluted per share | $1.58 million; $0.25 basic and $0.24 diluted per share |
| Cash from operations | $536,013 | $3.59 million |
| Cash | $8.27 million | $7.57 million at October 31, 2012 |
| Working capital | $21.90 million | $19.40 million at October 31, 2012 |
| Line of credit | $953,571 | $562,500 at October 31, 2012 |
Cost of sales was $27.64 million, or 88.2% of sales, versus $52.15 million, or 92.1%. Operating expenses totaled $1.90 million, up 3.6%; other expense was $135,257, including a $104,437 loss from equity-method investments. Income tax provision was $635,484. Total assets were $33.36 million and total liabilities were $8.93 million at January 31, 2013. The company paid dividends of $0.06 per share during the quarter.
Material changes and management commentary
- Sales declined $25.28 million, or 44.7%, primarily due to lower coffee prices and reduced wholesale green coffee volumes.
- Gross margin improved 3.9 percentage points. Management attributed the improvement to depletion of higher-cost inventory, more traditional inventory pricing, a greater roasted-coffee sales mix, and margin-improvement initiatives.
- Net income attributable to the company fell about 40.6%, reflecting lower sales and the Global Mark investment write-off, partly offset by improved gross margin.
- Operating cash flow fell to $536,013, mainly because accounts payable and accrued expenses decreased $4.52 million; lower inventory and receivables partly offset this cash use. Investing activities provided $163,675, including proceeds related to the Global Mark exit. Financing activities provided $3,694 after line-of-credit activity and dividend payments.
- The company withdrew from Global Mark after it failed to develop a significant customer base beyond Coffee Holding. The final accounting showed assets received were about $104,000 below expectations; the additional write-down was recognized at January 31, 2013.
Liquidity, risks, outlook and unusual items
The $7 million revolving facility is secured by company assets, bears a variable rate, and is extended through February 17, 2014. The company reported compliance with its other financial covenants. A combined $0.06-per-share dividend paid in December exceeded the facility’s $0.03 quarterly limit; Sterling National Bank granted a waiver. The company also guarantees up to $250,000 of financing to coffee-growing cooperatives through Triodos Sustainable Trade Fund.
Coffee futures and options are used to partially hedge coffee prices and secure supply, but are not designated as accounting hedges; fair-value changes run through earnings and may add volatility. Management cautions that hedging cannot eliminate price or counterparty risk. At quarter-end, the company held futures covering 9 million pounds and options covering 10.875 million pounds. One customer generated approximately 51% of quarterly sales and represented about $3.35 million of receivables. Four vendors accounted for approximately 60% of purchases.
The company recorded a $353,000 insurance receivable for Hurricane Sandy inventory damage; the insurer acknowledged the claim and confirmed payment was forthcoming. No specific financial guidance was provided. Management identified coffee-price and supply volatility, customer retention, competition, financing and covenant compliance, and joint-venture and facility performance among relevant risks. It reported no material change in risk factors, no material legal proceedings, and effective disclosure controls.
Important facts for investors to verify
- Whether the sharp sales decline and stronger gross margin persist, particularly as coffee prices and green-coffee volumes change.
- Progress in collecting the $353,000 insurance claim and resolving the Global Mark final settlement.
- Customer concentration, including the major customer’s sales and receivable exposure.
- Compliance with credit-facility covenants and the terms and continuing availability of the bank waiver for the excess dividend.
- Commodity positions, realized and unrealized trading results, and exposure to price movements and counterparty performance.
- Whether operating cash flow improves after the substantial reduction in accounts payable and accrued expenses.