Coffee Holding Co., Inc. — Q3 2013 Form 10-Q
Business and period: The company roasts, packages, markets and distributes coffee, and sells wholesale green coffee. This unaudited filing covers the three and nine months ended July 31, 2013, compared with the same periods in 2012.
Financial performance
| Metric | Three months ended July 31, 2013 | Three months ended July 31, 2012 | Nine months ended July 31, 2013 | Nine months ended July 31, 2012 |
|---|---|---|---|---|
| Net sales | $32.37 million | $44.48 million | $100.38 million | $138.17 million |
| Gross profit (loss) | $(1.16) million | $3.88 million | $3.91 million | $9.70 million |
| Gross margin | (3.6)% | 8.7% | 3.9% | 7.0% |
| Operating income (loss) | $(3.04) million | $2.02 million | $(1.76) million | $4.12 million |
| Net income (loss) attributable to Coffee Holding | $(2.11) million | $1.23 million | $(1.57) million | $2.44 million |
| Basic EPS | $(0.33) | $0.19 | $(0.25) | $0.38 |
Cash flow and liquidity: Operating activities used $6.08 million in the first nine months of 2013, versus providing $0.77 million in 2012. Investing activities used $0.36 million; financing activities provided $2.35 million. Cash fell $4.09 million to $3.48 million from October 31, 2012. At July 31, working capital was $19.26 million and stockholders’ equity was $21.66 million. The revolving credit balance was $3.30 million, up from $0.56 million; the facility’s maximum was $7 million and matures February 17, 2014. The company reported compliance with its financial covenants.
Material changes and management commentary
- Nine-month sales declined 27.4%; quarterly sales fell 27%. Management attributed lower sales chiefly to falling coffee prices. Quarterly green coffee pounds sold increased 13.7%, partly offsetting the decline, as the business mix shifted toward green coffee from private label sales.
- Management attributed margin deterioration and losses to hedging activity amid coffee prices sliding to a four-year low. Net realized and unrealized losses on coffee futures and options were $4.89 million for the nine months and $3.56 million for the quarter. Management cautioned that hedges may not offset price movements and can increase cost of sales and losses.
- The nine-month tax benefit was $0.49 million. The company reported an approximately $2.45 million tax loss and estimated an $0.83 million refund from carrying the loss back.
- The company ended its dividend program, announced June 13, 2013. A $0.06-per-share dividend was paid in December 2012.
- The company withdrew from Global Mark, an instant-coffee investment, and received cash, receivables and inventory; the final accounting resulted in an approximately $104,000 write-down in the first quarter of 2013.
Outlook, risks and other disclosures
The filing provides no specific financial guidance. Management identifies coffee-price and supply volatility, hedge effectiveness, customer retention, competition, financing access, restrictive credit covenants, and execution of growth and branding initiatives as risks. One customer represented approximately 59% of nine-month sales and $7.09 million of receivables at July 31, 2013. Four vendors accounted for approximately 67% of nine-month purchases. The company also disclosed related-party purchases from a vendor whose employee is a company director.
Management said disclosure controls were effective and reported no material change in internal control over financial reporting. No material subsequent events or material changes to previously disclosed risk factors were reported. The company reported no pending litigation other than routine business matters.
Important facts for investors to verify
- Whether subsequent results show recovery in gross margins and profitability after the substantial quarterly hedge losses.
- The nature, size and performance of hedge positions, and their relationship to physical coffee purchases and sales.
- The major customer’s ongoing sales contribution, receivable collection and credit exposure.
- Liquidity needs, borrowing availability and covenant compliance as the credit facility approaches its February 2014 maturity.
- Whether the estimated tax refund is realized and whether deferred tax assets remain recoverable.