Coffee Holding Co., Inc. — Q1 FY2017 Form 10-Q
Reporting period: Three months ended January 31, 2017; comparative period is the three months ended January 31, 2016. The interim financial statements are unaudited. Coffee Holding roasts, packages, markets and distributes coffee, sells green coffee, and manufactures coffee roasters. It reports as one segment.
Financial performance
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Net sales | $19.63 million | $22.81 million | Down 13.9% |
| Gross profit / margin | $3.13 million / 16.0% | $2.65 million / 11.6% | Gross profit up $0.48 million |
| Operating income | $612,410 | $810,239 | Down 24.4% |
| Net income attributable to Coffee Holding | $375,782 | $439,569 | Down 14.5% |
| Basic and diluted EPS | $0.06 | $0.07 | Down $0.01 |
| Cash from operating activities | $2.06 million | $3.79 million | Down $1.73 million |
Cost of sales was $16.50 million, or 84.1% of sales, versus $20.15 million, or 88.4%. Operating expenses rose to $2.52 million from $1.84 million, including about $245,000 from Sonofresco and higher shipping, payroll, professional fees and other costs related to growth investments. Interest expense increased to $57,742 from $39,803. The effective tax provision was $171,113 versus $302,564.
Liquidity, debt and cash flow
- At January 31, 2017, cash was $2.84 million; current assets were $30.06 million and current liabilities were $8.06 million. Working capital was $22.00 million, up from $21.67 million at October 31, 2016.
- Reported line-of-credit borrowings totaled $4.76 million, down from $6.96 million at October 31, 2016. The notes show $2.92 million outstanding on the company facility and $1.84 million on OPTCO’s facility, which the company guarantees. The company reported compliance with its financial covenants.
- Operating activities provided $2.06 million; investing activities used $255,126, primarily for equipment; financing activities used $2.20 million, mainly for net line-of-credit repayments. Cash decreased by $391,880 during the quarter.
- The credit facilities were extended to March 31, 2017, and the company was negotiating replacement or further extensions with Sterling National Bank. The filing says the company expects to fund operations, liabilities, capital expenditures and debt payments through January 31, 2018 using operating cash flow and its credit facility.
Material changes, outlook and risks
Sales fell primarily because wholesale transactions with the largest green-coffee customer declined by approximately $7.65 million; growth of about $4.4 million in branded and private-label sales partly offset the reduction. Lower commodity prices and reduced wholesale volume lowered cost of sales, while improved wholesale and roasted-coffee margins raised gross margin. Management attributed higher operating costs to reinvestment in growth and expansion.
After quarter-end, on February 24, 2017, the company acquired all of Comfort Foods, Inc. for $2.3 million in cash. Comfort Foods is a Massachusetts coffee roaster serving retail and foodservice customers. Acquisition accounting was incomplete; pro forma results, purchase-price allocation, acquisition expenses, and post-acquisition revenue and earnings were not available in the filing.
No specific earnings or revenue guidance was provided. Key disclosed risks include dependence on coffee as a commodity, volatile bean prices and supply, the effectiveness of hedging, competition, customer retention, financing availability, and execution of expansion efforts. The company was scaling back futures and options use but continued limited hedging and supply contracts. It held 39 coffee futures contracts for 1,462,500 pounds at a weighted average $1.44 per pound; the market price cited was $1.49. Trading instruments are not designated as accounting hedges, so fair-value changes affect earnings. The quarter’s realized and unrealized contract result was a net loss of about $15,811, compared with a $410,222 net loss a year earlier.
Four customers accounted for approximately 28% of sales in the quarter and about $3.74 million of receivables at period-end. Management reported no material changes to the risk factors in the prior Form 10-K, no material pending legal proceedings beyond routine litigation, and no material off-balance-sheet arrangements. Disclosure controls were reported effective.
Important facts for investors to verify
- Whether the company renewed or extended both Sterling credit facilities before the March 31, 2017 deadline, and the resulting terms, availability and covenants.
- Comfort Foods’ purchase-price allocation, acquisition costs, contribution to sales and earnings, and financing impact.
- Whether branded and private-label growth can offset lower volume from the largest wholesale green-coffee customer.
- How gross margins and earnings respond to coffee-price changes, hedging results, and higher operating expenses.
- Customer concentration, receivable collectability, and the company’s ability to maintain liquidity and fund operations through January 31, 2018.