Coffee Holding Co., Inc. — Form 10-Q Summary
Reporting period: Three and six months ended April 30, 2018; fiscal second quarter. The filing is unaudited. Coffee Holding roasts, packages, markets and distributes coffee, sells green coffee, and manufactures coffee roasters. It reports one operating segment.
Financial performance
| Metric | Three months ended Apr. 30, 2018 | Three months ended Apr. 30, 2017 | Six months ended Apr. 30, 2018 | Six months ended Apr. 30, 2017 |
|---|---|---|---|---|
| Net sales | $22.19 million | $17.79 million | $44.28 million | $37.42 million |
| Gross profit | $3.87 million | $2.64 million | $7.66 million | $5.77 million |
| Gross margin | 17.4% | 14.9% | 17.3% | 15.4% |
| Operating income | $863,486 | $97,924 | $1.75 million | $710,336 |
| Net income attributable to Coffee Holding | $510,849 | $1,737 | $942,236 | $377,519 |
| Basic and diluted EPS | $0.09 | $0.00 | $0.16 | $0.06 |
- Management attributed higher sales to increased branded, private-label and wholesale green-coffee sales to new and existing customers. Improved wholesale and roasted-coffee margins lifted gross margin.
- Operating expenses rose to $3.00 million for the quarter and $5.91 million for six months. Quarterly increases included shipping, salaries, commissions, professional fees and insurance; six-month expenses also reflected a full six months of CFI operations.
- Interest expense was $94,141 for the quarter and $186,649 for six months, up from the respective prior-year periods. Six-month income before taxes was $1.57 million; income tax provision was $394,916.
- Six-month operating cash flow was $565,398, down from $3.10 million. Investing used $3.02 million, including the Steep & Brew acquisition and equipment purchases; financing provided $3.36 million, principally from net line-of-credit advances. Cash increased by $906,463 to $3.23 million.
Financial position and material changes
- At April 30, 2018, current assets were $35.06 million and current liabilities $15.28 million; reported working capital was $19.79 million, down $479,523 from October 31, 2017. Total assets were $42.72 million and total liabilities $16.40 million.
- Line-of-credit borrowings increased to $12.21 million from $8.41 million. The amended Sterling facility has a $14 million maximum, a March 31, 2020 maturity, and interest at LIBOR plus 2%; the filing cites an approximate current rate of 3.9%. It is secured by the Company’s tangible and intangible assets.
- The Company and OPTCO breached an intercompany-loan restrictive covenant at April 30, 2018; the lender waived the noncompliance. The facility also has working-capital, net-profit and other covenants.
- On April 24, the 60%-owned joint venture Generations Coffee Company acquired substantially all assets of Steep & Brew for $2.74 million cash and a $150,000 seller note. The acquisition accounting was incomplete; recorded goodwill was $1.0 million and subject to measurement-period adjustment. The acquired business contributed $158,430 of revenue after acquisition.
- The Company repurchased 103,593 shares for approximately $438,791 during the six months. Shares outstanding were 5,702,342 at June 6, 2018.
Outlook, risks and other matters
- No specific financial guidance was provided. Management expected to fund operations, liabilities, capital expenditures and debt payments through April 30, 2019 using operating cash flow and the credit facility; additional borrowing depends on eligible receivables and inventory.
- Coffee prices and supply, hedging effectiveness, competition, customer retention, acquisition and joint-venture performance, financing access, and execution of growth plans are identified risks. The Company is scaling back futures and options use and expects to continue hedging only in a limited capacity. Derivatives are not designated as accounting hedges, so fair-value changes affect earnings and can increase volatility.
- At April 30, the Company held 140 futures contracts to purchase 5.25 million pounds of coffee at a weighted average $1.17 per pound; the stated market price was $1.23. Six-month commodity-contract gains totaled $160,073, including an $852,909 unrealized gain, offset by realized losses.
- Five customers generated approximately 20% of six-month sales. A vendor associated with a Company director supplied approximately $4.43 million of purchases during the six months; related-party cost of sales was $4.4 million. Management reported no material subsequent events, no material changes to previously disclosed risk factors, and no pending material legal proceedings beyond routine litigation.
Important facts for investors to verify
- Whether operating cash flow improves and whether the Company maintains compliance with all loan covenants following the waiver.
- Borrowing-base availability and liquidity headroom under the $14 million secured credit facility, given $12.21 million outstanding.
- Final purchase-price allocation for Steep & Brew and the acquired business’s contribution to sales, margins and earnings.
- Whether gross-margin improvement is sustainable and how product mix, coffee prices and reduced hedging affect results.
- Customer and related-party supplier concentration, including the director-affiliated vendor relationship.