Coffee Holding Co., Inc. — Form 10-Q Summary
Business and period: The company roasts, blends, packages, markets and distributes coffee, and sells green coffee. It reports one operating segment. This unaudited filing covers the quarter and six months ended April 30, 2014; balance-sheet figures are compared with October 31, 2013.
Financial performance
| Metric | Three months ended April 30, 2014 | Six months ended April 30, 2014 |
|---|---|---|
| Net sales | $25.40 million, down 30.8% year over year | $52.75 million, down 22.4% |
| Gross profit and margin | $3.96 million; 15.6%, versus $1.38 million and 3.8% | $8.08 million; 15.3%, versus $5.07 million and 7.4% |
| Operating income (loss) | $2.09 million, versus a $510,076 loss | $4.34 million, versus $1.28 million |
| Net income attributable to Coffee Holding | $1.26 million ($0.20 basic EPS; $0.19 diluted), versus a $395,512 loss | $2.63 million ($0.41 basic EPS; $0.40 diluted), versus $542,025 |
| Operating cash flow | Not separately reported | $3.83 million, versus $1.23 million |
For the quarter, green coffee pounds sold fell 20%; for the six-month period they fell 5%. Management attributed lower volumes primarily to customers reducing purchases amid market volatility and sharply higher coffee prices. Cost of sales declined to 84.4% of sales for the quarter and 84.7% for six months, compared with 96.2% and 92.6%, respectively. Management cited favorable inventory positions and hedging results for the margin improvement.
Commodity contracts produced a reported net gain of $1.33 million for the quarter and $2.36 million for six months, compared with losses of $1.35 million and $1.32 million in the comparable 2013 periods. These non-hedge-designated contracts are marked to fair value through earnings, so results may be volatile. The six-month income tax provision was $1.66 million, versus $508,000 a year earlier.
Financial position and liquidity
- At April 30, cash was $6.42 million, up from $4.04 million at October 31, 2013. Working capital was $22.16 million, up from $19.42 million.
- Total assets were $32.04 million and total liabilities were $7.34 million. The company reported no line-of-credit borrowings at April 30, versus $1.23 million at October 31; it reported compliance with required credit-facility covenants.
- Six-month cash increased by $2.39 million. Operating activities provided $3.83 million; investing activities used $167,000, primarily for equipment; financing activities used $1.28 million, including net line-of-credit repayments.
- The revolving credit facility is secured by company assets and was extended through February 17, 2015. Management said it expected to fund operations, liabilities, capital expenditures and debt payments through October 31, 2014 with operating cash flow and access to the facility.
Outlook, risks and other matters
- No numerical earnings or revenue guidance was provided. Management’s stated funding expectation runs through October 31, 2014.
- Customer concentration is significant: one customer generated approximately 52% of six-month sales and represented about $5.58 million of receivables at April 30. The same customer generated approximately 50% of quarterly sales. Four vendors supplied 64% of six-month purchases.
- Key disclosed risks include coffee-price and supply volatility, the effectiveness and earnings impact of hedges, customer retention and concentration, competition, financing and covenant requirements, joint ventures, and operations at the Colorado facility. Management cautioned that hedging cannot eliminate price or counterparty risk.
- The filing reports no material changes to the prior annual report’s risk factors, no material pending legal proceedings beyond routine litigation, and no material off-balance-sheet arrangements. Management assessed disclosure controls as effective and reported no material change in internal control over financial reporting.
Investor verification priorities
- Assess the sustainability of margin and earnings improvement given the substantial contribution from commodity-contract gains and favorable inventory positions.
- Track sales volumes, customer purchasing behavior, and the effect of higher coffee prices on demand and revenue.
- Monitor the major customer’s sales and receivable concentration, collections, and the company’s allowance estimates.
- Confirm continued covenant compliance, borrowing availability under the asset-based facility, and liquidity through fiscal year-end.
- Review coffee-price exposures, open derivative positions, valuation changes, and potential counterparty or supply risks.