Coffee Holding Co., Inc. — Form 10-Q Summary
Reporting period: Third quarter and nine months ended July 31, 2015. The company is a single-segment wholesale coffee business, selling green coffee and roasted private-label and branded products. Interim financial statements are unaudited.
Financial results and liquidity
| Metric | Three months ended July 31, 2015 | Three months ended July 31, 2014 | Nine months ended July 31, 2015 | Nine months ended July 31, 2014 |
|---|---|---|---|---|
| Net sales | $27.04 million | $26.63 million | $95.71 million | $79.37 million |
| Gross profit | $2.05 million | $3.05 million | $2.89 million | $11.13 million |
| Gross margin | 7.6% | 11.5% | 3.0% | 14.0% |
| Operating income (loss) | $161,483 | $1.24 million | $(2.88) million | $5.58 million |
| Net income (loss) attributable to Coffee Holding | $139,162 | $758,947 | $(1.84) million | $3.39 million |
| Basic and diluted EPS | $0.02 | $0.12 basic; $0.11 diluted | $(0.30) | $0.53 basic; $0.51 diluted |
- Cash flow: Nine-month operating cash use was $1.81 million, investing cash use was $351,194, and financing provided $1.69 million. Cash declined $467,462 to $3.32 million.
- Balance sheet at July 31, 2015: Cash $3.32 million; current assets $31.94 million; current liabilities $10.35 million; working capital $21.59 million; total assets $35.31 million; total liabilities $11.16 million; and total equity $24.15 million, including $23.88 million attributable to Coffee Holding stockholders.
- Borrowings: The balance sheet reports a $4.27 million line-of-credit balance, compared with $2.50 million at October 31, 2014. The company reports a $3.03 million balance on its existing facility and $1.24 million on OPTCO’s new facility. The facilities bear interest at 3.25%, mature February 28, 2017, are secured by company assets, and include financial and operating covenants. The company stated it was in compliance with covenants.
Changes versus comparable periods
- Third-quarter sales rose 1.5%, but net income fell to $139,162 from $758,947. Management attributed lower margins chiefly to higher production costs, lower green-coffee commodity prices affecting wholesale green sales, and weaker hedging results than in 2014. Management said third-quarter 2014 hedging gains added about $0.04 per share; excluding hedging, it estimated EPS of about $0.05 in 2015 versus $0.08 in 2014.
- Nine-month sales increased 20.6%, while gross profit fell $8.24 million and the company moved from net income to a net loss. Management attributed the margin decline largely to approximately $5.4 million of net losses from liquidating prior hedging positions as it reduced hedging and short-term futures/options trading, as well as lower commodity prices.
- Accounts receivable declined to $12.00 million from $15.42 million, and inventory declined to $12.44 million from $15.21 million. The line-of-credit balance rose by $1.77 million, while working capital decreased $1.89 million from October 31, 2014.
Outlook, risks, and other matters
- No quantified earnings or revenue guidance is provided. Management says it intends to continue using hedging in a limited capacity after scaling back activity amid commodity-market volatility.
- Commodity price and supply volatility, ineffective hedging, competition, customer retention, financing availability and compliance with loan covenants are identified as risks. The company notes that futures/options losses can materially raise cost of sales and reduce profitability.
- Customer concentration is significant: one customer generated approximately 57% of nine-month sales and represented about $5.4 million of receivables at July 31, 2015. Four vendors supplied approximately 64% of nine-month purchases.
- Related-party matters include approximately $17.9 million of nine-month purchases from a vendor whose employee is a company director, and $313,729 of nine-month processing costs incurred by the company’s 40% joint-venture partner.
- The company reported no material change in risk factors, no material off-balance-sheet arrangements, and no pending legal proceedings other than routine litigation. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
- Management is evaluating the effects of new revenue-recognition and inventory accounting standards. No material subsequent events were identified.
Important facts for investors to verify
- Reconcile the filing’s debt disclosures: the balance sheet and facility notes indicate total line-of-credit borrowings of $4.27 million, while the market-risk section states debt of $5.77 million; the supplied text does not explain this difference.
- Confirm the magnitude and timing of hedging-related losses, including the approximately $5.4 million nine-month net loss cited by management and the decision to reduce hedging activity.
- Assess exposure to the dominant customer and the collectibility of its receivable, alongside the concentration of purchases among a small group of vendors.
- Monitor cash generation, working capital, and borrowing capacity, as well as covenant compliance under asset-secured credit facilities.