Coffee Holding Co., Inc. — Q3 2012 Form 10-Q
Business and period: The company roasts, packages, markets and distributes private-label and branded coffee and sells wholesale green coffee. This unaudited report covers the three and nine months ended July 31, 2012; the balance sheet is compared with October 31, 2011.
Financial performance
| Metric | Three months ended July 31 | Nine months ended July 31 |
|---|---|---|
| Net sales | $44.48 million, up 24% from $35.76 million | $138.17 million, up 40% from $98.74 million |
| Gross profit and margin | $3.88 million; 8.7%, versus $2.09 million and 5.9% | $9.70 million; 7.0%, versus $8.77 million and 8.9% |
| Operating income | $2.02 million, versus $0.34 million | $4.12 million, versus $3.55 million |
| Net income attributable to Coffee Holding | $1.23 million, or $0.19 per basic and diluted share, versus $0.17 million, or $0.03 | $2.44 million, or $0.38 basic and $0.37 diluted per share, versus $2.40 million, or $0.44 basic and diluted |
Management attributed quarterly sales growth to higher volume in green, private-label and branded coffee. Quarterly margin improvement reflected higher selling prices, better-priced inventory and realized and unrealized gains; nine-month margin decline reflected higher green coffee costs, lower hedging returns and a shift toward green coffee sales. Nine-month operating expenses increased 6.7% to $5.58 million. Income taxes were $1.46 million for nine months, up from $1.06 million.
Cash flow, liquidity and capital
- Cash fell to $1.37 million from $4.24 million at October 31, 2011. Working capital was $19.28 million, down modestly from $19.61 million; total equity was $23.92 million.
- Nine-month operating cash flow was positive $0.77 million, versus cash used of $1.39 million a year earlier. Investing used $2.62 million, including $2.10 million for equity investments and $0.52 million for equipment. Financing used $1.02 million, including $0.58 million in dividends and a net reduction in line borrowings.
- Outstanding variable-rate line-of-credit debt was $1.38 million, down from $1.82 million. The $7 million revolving facility was extended to February 17, 2014; its rate is prime plus 1%. The company reported compliance with its financial covenants.
- The company paid dividends of $0.03 per share each quarter. It reported no material off-balance-sheet arrangements.
Changes, outlook and risks
- In November 2011, the company acquired a 40% interest in Global Mark LLC, an instant-coffee supplier, for an investment of up to $2 million and preferred pricing. The balance sheet shows equity investments of $2.07 million; the company reported a nine-month net loss from equity investments of $27,471.
- The CORDAID guarantee agreement supporting the credit facility expired March 31, 2012 and was not renewed. The company also reported that OPTCO’s former Vancouver lease and two executive employment agreements expired in May 2012 and were not renewed; OPTCO moved to a new three-year lease in April.
- No specific financial guidance was provided. Management cautioned that results are affected by coffee prices and supply, customer retention, competition, sales mix, inventory and hedging outcomes. It expects hedging may be used to a lesser extent as the business and revenue mix change.
- Commodity futures and options are not designated as accounting hedges; fair-value changes affect earnings and may increase volatility. The company disclosed exposure to losses if coffee prices decline sharply or counterparties fail to perform.
- One customer accounted for approximately 63% of sales in both the quarter and nine-month period; it represented about $6.89 million of receivables at July 31. Four vendors accounted for approximately 62% of nine-month purchases. A vendor with a company director relationship accounted for about $23.4 million of nine-month purchases.
- Management identified credit and inventory estimation risk: each additional 1% of receivables becoming uncollectible or inventory being written down would reduce quarterly operating income by approximately $136,000 or $112,000, respectively. The filing reported no material change in risk factors, no material pending legal proceedings, and effective disclosure controls.
Important facts for investors to verify
- Whether the concentrated customer remains a reliable source of sales and timely collections.
- How coffee prices, sales mix and hedge results affect margins and earnings in subsequent periods.
- Liquidity and borrowing availability under the asset-based credit facility, including covenant compliance after the CORDAID guarantee expired.
- The performance and valuation of the Global Mark and Healthwise equity investments and the benefit of Global Mark’s preferred pricing.
- Whether receivable allowances, inventory values and deferred tax assets remain supportable; management noted the net deferred tax asset could require a valuation allowance if taxable income is not generated.