Coffee Holding Co., Inc. — Form 10-Q summary
Business and period: The company roasts, packages, markets and distributes coffee, and sells green coffee. This unaudited report covers the three and nine months ended July 31, 2016 (fiscal third quarter); balance-sheet comparisons are with October 31, 2015.
Financial performance
| Metric | Three months ended July 31 | Nine months ended July 31 |
|---|---|---|
| Net sales | 2016: $17.35 million; 2015: $27.04 million | 2016: $61.57 million; 2015: $95.71 million |
| Gross profit / margin | 2016: $3.15 million / 18.1%; 2015: $2.05 million / 7.5% | 2016: $9.11 million / 14.8%; 2015: $2.89 million / 3.0% |
| Operating income (loss) | 2016: $1.28 million; 2015: $0.16 million | 2016: $3.45 million; 2015: $(2.88) million |
| Net income (loss) attributable to Coffee Holding | 2016: $0.76 million ($0.12 per share); 2015: $0.14 million ($0.02 per share) | 2016: $2.03 million ($0.33 per share); 2015: $(1.84) million ($(0.30) per share) |
- Cash flow: For the nine months, operating activities used $1.27 million, investing activities used $1.52 million, and financing activities provided $0.76 million. Cash declined by $2.02 million to $1.83 million.
- Liquidity and debt: Working capital was $22.37 million. Current assets were $32.16 million and current liabilities $9.80 million. Revolving credit borrowings totaled $7.26 million, up from $5.55 million at October 31, 2015. The company reported compliance with required financial covenants.
- Balance sheet: Total assets were $36.40 million and total liabilities $10.59 million. Stockholders’ equity attributable to Coffee Holding was $25.47 million.
Material changes and management commentary
- Sales fell 35.8% in the quarter and 35.7% year to date, largely because wholesale transactions with the largest green-coffee customer declined by approximately $9.38 million and $32.62 million, respectively.
- Despite lower sales, gross margins improved substantially. Management attributed the improvement to better margins in wholesale and roasted coffee, a more favorable inventory position, and smaller hedging losses compared with the prior-year periods.
- Commodity contracts generated a net gain of $0.91 million for the nine months, compared with a net loss of $5.42 million in the prior-year period. These contracts are not designated as accounting hedges, and gains and losses are recognized in earnings.
- On June 29, 2016, the company acquired substantially all assets of Coffee Kinetics through its Sonofresco subsidiary for $856,904 cash and 38,364 shares valued at $200,003. Acquired operations contributed $146,000 of revenue after closing.
- The company repurchased 80,200 shares for approximately $453,607 during the quarter. It paid $100,000 in dividends during the nine-month period.
- Management expected to fund operations, liabilities, capital spending and debt payments through July 31, 2017 using operating cash flow and its credit facility; additional borrowing capacity depends in part on eligible receivables and inventory.
Risks, contingencies and other notable disclosures
- Customer concentration is significant: one customer represented approximately 33% of nine-month sales and $8.59 million of receivables at July 31, 2016. The filing also reports that this customer represented 23% of quarterly sales.
- The business is exposed to coffee-price and supply volatility, customer and vendor concentration, competition, and the effectiveness of its hedging strategy. Management said it was scaling back hedging and short-term futures and options trading, while continuing limited use of contracts.
- Debt is variable-rate and secured by company assets; the facilities were scheduled to terminate February 28, 2017. The company also guarantees OPTCO’s facility obligations.
- Management identified possible sensitivity to receivable collectability, inventory write-downs, deferred-tax-asset realization and goodwill impairment. It reported no material change in risk factors from its latest annual report.
- No material pending legal proceedings were reported. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Investor verification checklist
- Assess how much the improved profit and gross margin depended on commodity-contract gains and whether margin improvement persists.
- Monitor sales, receivable collection and credit exposure to the largest customer, including the reported $8.59 million receivable balance.
- Review liquidity, borrowing-base availability, covenant compliance and the February 2017 credit-facility expirations.
- Evaluate the performance and integration of Sonofresco, including acquisition-related goodwill and future contribution to sales and earnings.
- Check subsequent filings for changes in hedging practices, coffee prices, cash generation and customer concentration.