Coffee Holding Co., Inc. — Form 10-Q Summary
Reporting period: Third quarter and nine months ended July 31, 2014; balance-sheet comparisons are against October 31, 2013. The unaudited company roasts, packages, markets and distributes coffee, and sells green coffee. It reports one business segment.
Financial performance
| Metric | Three months ended July 31, 2014 | Three months ended July 31, 2013 | Nine months ended July 31, 2014 | Nine months ended July 31, 2013 |
|---|---|---|---|---|
| Net sales | $26.63 million | $32.37 million | $79.37 million | $100.38 million |
| Gross profit (loss) | $3.05 million | $(1.16) million | $11.13 million | $3.91 million |
| Gross margin | 11.5% | (3.6)% | 14.0% | 3.9% |
| Operating income (loss) | $1.24 million | $(3.04) million | $5.58 million | $(1.76) million |
| Net income (loss) attributable to Coffee Holding | $0.76 million | $(2.11) million | $3.39 million | $(1.57) million |
| Diluted earnings (loss) per share | $0.11 | $(0.33) | $0.51 | $(0.25) |
- Quarterly sales fell 17.7%; management attributed the decline primarily to a 20% decrease in pounds of green coffee sold amid market volatility and higher coffee prices. Nine-month sales fell 20.9%, with pounds sold down 5%.
- Gross profitability improved substantially, which management attributed to favorable inventory positions and gains on coffee hedges. Nine-month realized and unrealized hedge gains totaled $2.74 million, compared with losses of $4.89 million in the prior-year period.
- Operating expenses decreased 3.6% for the quarter and 2.1% for the nine months. Nine-month income tax provision was $2.11 million, versus a $0.49 million tax benefit in the prior-year period.
Cash flow, balance sheet and liquidity
- For the nine months, operating activities used $1.81 million of cash, improved from $6.08 million used a year earlier. Inventory growth used $3.59 million and receivables growth used $1.00 million, among other working-capital movements. Investing activities used $0.40 million; financing activities provided $1.56 million. Cash declined $0.65 million to $3.39 million.
- At July 31, 2014, current assets were $31.74 million and current liabilities $9.53 million; working capital was $22.21 million, up from $19.42 million at October 31, 2013. Inventory was $12.96 million, up from $9.37 million, largely reflecting increased green coffee inventory.
- The revolving credit balance was $3.50 million, up from $1.23 million. The facility provides up to $7 million, is secured by company assets, and was extended to February 17, 2015. Its rate was described as prime plus 1%; the filing reports a 3.75% reference rate at July 31, 2014. The company reported compliance with covenants.
- Total liabilities were $10.40 million and total equity was $24.83 million at July 31, 2014. The company said it expected to fund operations and obligations through October 31, 2014 with operating cash and the credit facility.
Management commentary, risks and other notable items
- There is no specific earnings or revenue guidance. Management’s stated liquidity outlook covers funding operations through October 31, 2014.
- Customer concentration is significant: one customer represented approximately 52% of sales in both the quarter and nine-month period and owed approximately $7.9 million at July 31. Four vendors supplied about 62% of nine-month purchases; a vendor whose employee is a company director accounted for approximately $13.2 million of nine-month purchases.
- Coffee futures and options are used to partially hedge bean-price and supply risks, but are not designated as hedge accounting instruments; fair-value changes flow through earnings and can increase volatility. The company reported options and futures positions each covering 6 million pounds at July 31. Management cautioned that hedging cannot eliminate price or counterparty risks.
- The company repurchased 99,815 shares for $660,778 during the nine months under a $1 million authorization; $342,464 remained available at July 31, before brokerage fees. No dividend was declared for the 2014 period.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting. The filing reported no material risk-factor changes, no material pending litigation beyond routine matters, and no material off-balance-sheet arrangements.
Key facts for investors to verify
- Whether the improved margins and earnings are sustainable given that hedge gains and favorable inventory positions were key contributors.
- How customer concentration, including the customer’s $7.9 million receivable, affects collections and sales exposure.
- Inventory quality, turnover and funding needs following the substantial increase in green coffee inventory.
- Availability and renewal terms of the credit facility, which was due to expire in February 2015, and the company’s ability to satisfy its covenants.
- The effects of coffee-price movements and derivatives on reported results; the filing presents commodity fair values and hedge results that investors may wish to reconcile with earnings and cash-flow disclosures.