Coffee Holding Co., Inc. — Q2 FY2012 Form 10-Q
Reporting period: Three and six months ended April 30, 2012; balance-sheet comparisons are to October 31, 2011. The company roasts, packages, markets and distributes coffee and sells green coffee through wholesale, private-label and branded product lines.
Financial performance
| Metric | Three months ended Apr. 30, 2012 | Three months ended Apr. 30, 2011 | Six months ended Apr. 30, 2012 | Six months ended Apr. 30, 2011 |
|---|---|---|---|---|
| Net sales | $37.09 million | $37.33 million | $93.69 million | $62.97 million |
| Gross profit | $1.38 million | $3.60 million | $5.83 million | $6.68 million |
| Gross margin | 3.7% | 9.6% | 6.2% | 10.6% |
| Operating income (loss) | $(0.52) million | $1.81 million | $2.10 million | $3.21 million |
| Net income (loss) attributable to Coffee Holding | $(0.37) million | $1.19 million | $1.21 million | $2.23 million |
| EPS, basic / diluted | $(0.06) / $(0.06) | $0.22 / $0.22 | $0.19 / $0.18 | $0.41 / $0.41 |
- Revenue and earnings: Six-month sales rose 49%, attributed mainly to more pounds sold, green coffee sales to new customers and increased branded sales; private-label sales declined. Despite higher sales, six-month net income fell about 46%. Second-quarter sales were down 0.6% and the company recorded a quarterly loss.
- Margins and unusual trading results: Cost of sales was 96.3% of quarterly sales and 93.8% of six-month sales, compared with 90.3% and 89.4%, respectively, in the prior periods. Management attributed margin pressure to coffee costs, hedging results and a sales mix shift toward lower-margin green coffee. Commodity trading produced a $1.38 million loss in the quarter and a $0.41 million loss for six months; the six-month result included a $1.30 million unrealized gain, offset by realized losses.
- Cash flow: Six-month operating activities provided $2.45 million, versus $1.64 million in 2011. Investing used $2.19 million, including the $2.00 million Global Mark investment; financing used $2.07 million, including line-of-credit repayments and $0.39 million in dividends. Cash declined $1.81 million to $2.43 million.
- Liquidity and debt: Working capital was $18.53 million, down from $19.61 million at October 31, 2011. Current assets were $25.18 million and current liabilities $6.66 million. The revolving credit balance fell to $137,500 from $1.82 million. The $7 million secured facility was extended to February 17, 2014; its rate was amended to WSJ Prime plus 1%. The company reported compliance with its financial covenants.
- Balance sheet and capital: Total assets were $30.22 million, down from $38.78 million; total equity was $22.85 million, up from $21.99 million. The company declared and paid quarterly dividends of $0.03 per share. It had 6,372,309 common shares outstanding as of June 7, 2012.
Material changes, outlook and risks
- The company invested $2 million in Global Mark LLC for a 40% interest and preferred pricing on instant coffee. It recorded a $31,098 equity-method loss for the six months.
- OPTCO met the second profit target under its acquisition agreement; up to 5,000 additional shares were expected to be issued in the third quarter.
- The CORDAID guarantee agreement expired March 31, 2012 and was not renewed. A separate corporate guarantee to Triodos Sustainable Trade Fund, capped at $250,000, is disclosed.
- No specific financial guidance or quantified outlook is provided. Management expects to continue using coffee futures and options, but says hedging may be used to a lesser extent as the business and revenue mix change. Hedging cannot eliminate commodity-price or supply risks and has caused material period-to-period earnings volatility.
- Customer concentration is significant: one customer accounted for approximately 62% of six-month sales and 54% of quarterly sales; its April 30 receivable balance was approximately $3.11 million. Four vendors represented approximately 61% of six-month purchases. A vendor related through a director accounted for approximately $17.5 million of six-month purchases.
- Other disclosed risks include coffee price and supply fluctuations, ineffective hedges, customer retention and credit risk, financing and covenant compliance, competition, and dependence on key personnel. Management reported no material changes to the prior annual report’s risk factors, no material pending legal proceedings beyond routine litigation, and effective disclosure controls.
Important facts for investors to verify
- Whether sales growth and the shift toward green coffee can support margins after the quarter’s sharp gross-margin decline and commodity-trading loss.
- The scale and collectibility of the largest customer’s sales and receivables, and the effect of that concentration on liquidity.
- Global Mark’s operating performance, the remaining investment commitments, and whether preferred pricing benefits the company.
- The effect of the expired CORDAID guarantee on working-capital financing and the availability and terms of the bank facility.
- Potential dilution from warrants and contingent OPTCO shares, and the sustainability of quarterly dividends under the credit facility’s restrictions.