Coffee Holding Co., Inc. — Q1 FY2018 10-Q
Business context and reporting period. The unaudited quarter ended January 31, 2018. Coffee Holding roasts, packages, markets and distributes coffee, sells green coffee, and manufactures coffee roasters. It reports as one business segment.
Financial performance and position
| Metric | Q1 FY2018 | Q1 FY2017 / comparison |
|---|---|---|
| Net sales | $22.08 million | $19.63 million; up 12.5% |
| Gross profit and margin | $3.80 million; 17.2% | $3.13 million; 15.9% |
| Operating income | $888,626 | $612,410 |
| Net income attributable to Coffee Holding | $431,387; $0.07 per diluted share | $375,782; $0.06 per diluted share |
| Cash from operating activities | $406,423 | $2.06 million |
| Cash and working capital at January 31, 2018 | $3.32 million cash; $20.69 million working capital | Cash was $2.33 million and working capital $20.27 million at October 31, 2017 |
| Line of credit at January 31, 2018 | $9.41 million outstanding | $8.41 million at October 31, 2017 |
Total assets were $40.27 million and total liabilities were $14.37 million at January 31, 2018. The revolving credit facility bears variable interest; the filing cites a 4.0% reference rate. It is secured by the company’s tangible and intangible assets. The company reported compliance with required financial covenants.
Material changes and cash flows
- Sales increased by $2.45 million. Management attributed the increase to approximately $4.4 million in higher branded and private-label sales to new and existing customers.
- Gross margin improved, which management attributed to better margins in wholesale and roasted coffee. Cost of sales was 82.8% of sales, versus 84.1% a year earlier.
- Operating expenses rose $387,755, including approximately $435,000 of CFI selling and administrative expenses; CFI was acquired in February 2017 and was not in the prior-year quarter. Excluding those CFI expenses, management said operating expenses would have declined by about $48,000.
- Interest expense increased by $34,766 year over year. The company’s net income before noncontrolling interest was $580,586; $149,199 was attributable to noncontrolling interests.
- Operating cash flow fell to $406,423, with increased receivables using $1.20 million of cash, partly offset by a $1.23 million inventory reduction. Investing activities used $145,452, mainly for equipment. Financing activities provided $735,172, including $1.00 million of additional line-of-credit borrowing and $264,928 of treasury-stock purchases.
Outlook, risks and notable items
- Management expected to fund operations, liabilities, capital expenditures and debt payments through January 31, 2019 using operating cash flow and the credit facility. It noted that higher eligible receivables and inventory could support additional borrowing.
- At filing, the existing credit agreement had been extended through March 31, 2018. Management reported an agreement in principle with Sterling for a facility maturing March 31, 2020, with a $14 million maximum and interest at LIBOR plus 2%; it expected to finalize it by March 31 or seek another extension.
- Key risks include coffee price and supply volatility, effectiveness and potential losses from hedging, variable interest rates, customer retention and competition, and the ability to obtain financing. The company was scaling back hedging and short-term futures and options trading but expected to continue limited use. Derivative gains and losses are recognized in earnings and can add volatility.
- Four customers generated approximately 25% of quarterly sales and represented about $7.71 million of receivables at January 31, 2018. Four vendors represented approximately 20% of purchases. Purchases from a vendor whose employee was a company director were approximately $1.40 million for the quarter.
- The Tax Cuts and Jobs Act reduced the federal corporate rate; the estimated discrete effect on the quarter was immaterial. Management said final tax effects could differ and anticipated completing any adjustments within one year of enactment.
- The company repurchased 63,041 shares for $264,928 during the quarter under its 2017 repurchase program. Management reported no material change in risk factors, no material legal proceedings beyond routine litigation, and effective disclosure controls.
Investor verification points
- Confirm whether the proposed Sterling credit facility was finalized or the existing facility further extended, and review its final terms, covenants and borrowing availability.
- Monitor receivables, inventory, operating cash conversion and customer concentration, particularly the four customers’ $7.71 million receivable balance.
- Track gross margins, CFI integration costs and interest expense as borrowings and variable rates change.
- Review coffee futures and options positions, realized and unrealized results, and exposure to coffee-price or counterparty movements.
- Check subsequent filings for final Tax Act accounting impacts and any changes in deferred tax asset recoverability.