Coffee Holding Co., Inc. — Q2 FY2017 Form 10-Q
Reporting period: Quarter and six months ended April 30, 2017. The company roasts, markets and distributes wholesale green, private-label and branded coffee and sells coffee roasting equipment. Results are unaudited.
Financial performance
| Metric | Three months ended Apr. 30, 2017 | Three months ended Apr. 30, 2016 | Six months ended Apr. 30, 2017 | Six months ended Apr. 30, 2016 |
|---|---|---|---|---|
| Net sales | $17.79 million | $21.41 million | $37.42 million | $44.21 million |
| Gross profit | $2.64 million | $3.31 million | $5.77 million | $5.96 million |
| Gross margin | 14.9% | 15.5% | 15.4% | 13.5% |
| Operating income | $97,924 | $1.36 million | $710,336 | $2.17 million |
| Net income attributable to Coffee Holding | $1,737 | $830,801 | $377,519 | $1.27 million |
| Diluted EPS | $0.00 | $0.14 | $0.06 | $0.21 |
For the six months, operating cash flow was $3.10 million, investing cash outflow was $3.28 million, and financing cash inflow was $419,371. Cash increased by $238,655 to $3.47 million. Operating cash flow was broadly stable versus the prior-year period ($3.00 million).
At April 30, 2017, current assets were $31.79 million, current liabilities $11.41 million, and reported working capital $20.38 million. The balance sheet reports total liabilities of $12.36 million and total equity of $25.37 million. Cash was $3.47 million; inventory was $15.80 million. The company reported a $12 million maximum revolving facility, including an OPTCO sublimit of $3 million.
Changes and management commentary
- Sales fell 16.9% for the quarter and 15.4% for the six-month period. Management attributed the declines primarily to lower wholesale sales to its largest green-coffee customer—approximately $7.9 million lower for the quarter and $15.5 million lower for six months—partly offset by branded and private-label sales increases of about $4.3 million and $8.7 million, respectively.
- Six-month gross margin improved to 15.4% from 13.5%, but gross profit declined modestly as sales contracted. Quarterly gross margin declined to 14.9% from 15.5%. Management cited improved margins in wholesale and roasted operations, while noting the CFI acquisition’s purchase price affected gross profit.
- Operating expenses rose to $5.06 million for six months from $3.79 million, reflecting growth investments and expenses from SONO and the newly acquired Comfort Foods, Inc. (CFI), as well as higher shipping, salary, insurance, depreciation and technology costs. Interest expense also increased.
- On February 23, 2017, the company acquired CFI for $2.3 million cash and paid approximately $605,000 of its existing bank debt. CFI contributed $732,660 of revenue after acquisition during the period. The preliminary purchase accounting included $1.36 million of goodwill and was not complete at filing.
- On April 25, 2017, the company and OPTCO consolidated and amended their Sterling National Bank facilities, extending maturity to February 28, 2018, setting a combined maximum of $12 million, and changing the rate to LIBOR plus 2.4%. The facilities are secured by company assets and carry financial and operating covenants; the company reported covenant compliance at April 30.
- Management expected to fund operations, liabilities, capital expenditures and debt payments through April 30, 2018 using operating cash flow and the credit facility. No quantified sales or earnings guidance was provided.
Risks, contingencies and unusual items
- Coffee-price volatility and hedging results can materially affect cost of sales and earnings. The company said it was scaling back hedging and short-term trading to limited use. Six-month commodity-contract results were a net loss of $508,584; unrealized losses were $735,331. At April 30, futures covered 2.81 million pounds at a weighted-average $1.43 per pound, versus a stated market price of $1.33.
- Customer concentration remains relevant: four customers generated approximately 26% of six-month sales and represented about $3.91 million of receivables. The largest wholesale customer’s reduced purchases were a principal cause of the sales decline.
- The company identified potential sensitivity to receivable collectability, inventory valuation, deferred-tax-asset realization and goodwill/intangible-asset impairment. It reported a net deferred tax asset of $670,346.
- Debt is variable-rate and secured by company assets. Coffee Holding cited an approximately 4.0% rate in its market-risk discussion. Its forward-looking risks also include competition, supply disruptions, customer retention, financing availability, joint-venture performance and economic conditions.
- The filing reported no material changes to previously disclosed risk factors, no material legal proceedings beyond routine litigation, and no material off-balance-sheet arrangements. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Debt balance discrepancy: The balance sheet and MD&A show a $7.39 million line-of-credit liability, while the debt note states outstanding bank borrowings of $5.60 million at April 30, 2017. The filing text does not clearly reconcile these values.
- Acquisition accounting and contribution: Verify completion of CFI purchase accounting, final goodwill allocation and subsequent operating performance; the filing gives only post-acquisition revenue of $732,660.
- Customer exposure: Monitor the largest wholesale customer’s purchases and whether branded/private-label growth continues to offset lost wholesale volume.
- Commodity and margin exposure: Review subsequent futures/options positions, realized and unrealized results, and the effects of the company’s reduced hedging activity.
- Liquidity and covenants: Confirm borrowing availability under the amended facility, covenant headroom and the ability to refinance or repay before the February 2018 maturity.
- Period comparability: Results include CFI only after its February 2017 acquisition; the filing also describes the acquisition date as February 23 in the notes and February 24 in MD&A.