Business Context and Reporting Period
Company: Coffee Holding Co., Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: April 30, 2011
Business Overview: The Company is an integrated wholesale coffee roaster and dealer operating in the United States. Its operations are divided into three product lines: Wholesale Green Coffee, Private Label Coffee, and Branded Coffee. The Company operates as a single reporting segment. Key subsidiaries include Organic Products Trading Company, LLC (OPTCO), acquired in May 2010, and Generations Coffee Company, LLC (GCC), a joint venture in which the Company holds a 60% interest.
Key Financial Metrics
| Metric | Six Months Ended April 30, 2011 |
Six Months Ended April 30, 2010 |
Three Months Ended April 30, 2011 |
Three Months Ended April 30, 2010 |
|---|---|---|---|---|
| Net Sales | $62,973,110 | $41,276,459 | $37,332,017 | $19,917,308 |
| Gross Profit | $6,680,118 | $5,486,134 | $3,599,423 | $2,848,370 |
| Gross Margin % | 10.6% | 13.3% | 9.6% | 14.3% |
| Net Income (Attributable to Company) | $2,229,029 | $1,358,426 | $1,187,957 | $800,448 |
| Earnings Per Share (Basic/Diluted) | $0.41 | $0.25 | $0.22 | $0.15 |
| Cash and Cash Equivalents | $1,908,627 | $835,564 | (Balance Sheet Data) | |
| Working Capital | $12,966,017 | $11,188,355 | ||
| Line of Credit Outstanding | $1,521,223 | $2,306,749 | (Balance Sheet Data) | |
| Total Assets | $27,639,683 | $24,193,480 |
Cash Flow (Six Months Ended April 30, 2011):
- Net cash provided by operating activities: $1,638,790
- Net cash used in investing activities: $(283,580)
- Net cash used in financing activities: $(1,119,504)
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 52% year-over-year for the six-month period and 87% for the three-month period. This growth is attributed to higher sales prices, the addition of the OPTCO subsidiary, and increased volume in green coffee sales.
- Margin Compression: Gross profit margins declined from 13.3% to 10.6% (six months) and 14.3% to 9.6% (three months). Management attributes this to increased costs of green coffee, the shift in sales mix toward lower-margin green coffee versus roasted coffee, and the inclusion of OPTCO operations.
- Profitability: Net income increased 64% for the six-month period and 48% for the three-month period, driven primarily by the increase in gross profit dollars despite the margin percentage decline.
- Balance Sheet: Accounts receivable increased by $2.77 million and inventory by $1.22 million compared to the prior fiscal year-end, reflecting business growth. The line of credit balance decreased by approximately $785,000.
Guidance, Outlook, Risks, and Unusual Items
- Outlook: Management expects to fund operations through October 31, 2011, using cash from operating activities and the existing credit facility. The Company anticipates continued exposure to coffee price volatility.
- Commodity Hedging: The Company uses futures and options to hedge green coffee prices. As of April 30, 2011, the Company held 231 options covering 8.66 million pounds of green coffee but held no futures contracts. Realized and unrealized gains on these contracts totaled $1.9 million for the six months ended April 30, 2011.
- Customer Concentration Risk: Approximately 53% of sales for the six months ended April 30, 2011, were derived from a single customer. This customer also accounted for approximately $3.6 million of the accounts receivable balance.
- Vendor Concentration: Approximately 56% of purchases were from four vendors during the six-month period.
- Related Party Transactions: Significant related party costs included $11.7 million in the six months ended April 30, 2011, primarily from a vendor where an employee is a director of the Company.
- Dividends: The Company declared and paid quarterly dividends of $0.03 per share, totaling $333,978 for the six-month period.
- Contingent Consideration: The Company met the pre-tax net profit target for the OPTCO acquisition, triggering a supplemental common stock payment of up to 10,000 shares and a cash payment of $50,000, payable in June 2011.
Investor Verification Checklist
- Customer Concentration: Verify the stability of the single customer representing 53% of sales and the collectability of the $3.6 million receivable owed by them.
- Margin Sustainability: Assess the ability to maintain profitability given the shift toward lower-margin green coffee sales and rising input costs.
- Commodity Exposure: Review the effectiveness of the hedging strategy (options vs. futures) in mitigating the risk of green coffee price fluctuations.
- Related Party Transactions: Confirm the arm's-length nature of the $11.7 million in related party costs and the terms of the vendor relationship involving a Company director.
- Liquidity Covenants: Monitor compliance with the Sterling National Bank credit facility covenants, particularly regarding minimum working capital and leverage ratios.