Coffee Holding Co., Inc. — Form 10-Q Summary
Business context and reporting period
Wholesale coffee roaster and distributor selling green coffee, private-label coffee, and its own branded products; the company reports one operating segment. This unaudited filing covers the quarter and six months ended April 30, 2013, compared with the corresponding 2012 periods.
Key financial metrics
| Metric | Three months ended Apr. 30, 2013 | Six months ended Apr. 30, 2013 |
|---|---|---|
| Net sales | $36.69 million | $68.00 million |
| Gross profit / margin | $1.38 million / 3.8% | $5.07 million / 7.5% |
| Operating income (loss) | $(510,076) | $1.28 million |
| Net income (loss) attributable to Coffee Holding | $(395,512), or $(0.06) per share | $542,025, or $0.09 basic and $0.08 diluted per share |
| Operating cash flow | Not separately reported | $1.23 million |
At April 30, cash was $7.62 million, working capital was $21.21 million, total assets were $32.81 million, and total liabilities were $8.78 million. The Sterling revolving credit line had no balance outstanding (versus $562,500 at October 31, 2012); the facility is secured, has a stated $7 million limit, and expires February 17, 2014. The company reported compliance with its financial covenants. Six-month dividends paid were approximately $387,000 ($0.06 per share).
Material changes versus prior comparable periods
- Six-month sales fell 27.4% from $93.69 million; management cited lower coffee prices, reduced wholesale green coffee volumes, and a more normalized first-quarter sales pace. Quarterly sales declined 1.1% year over year, primarily due to lower coffee prices.
- Six-month gross profit declined to $5.07 million from $5.83 million, but gross margin increased to 7.5% from 6.2%, reflecting a higher share of roasted coffee sales and margin-improvement initiatives. Quarterly gross profit was essentially flat year over year, with gross margin around 3.8%.
- Six-month attributable net income declined to $542,025 from $1.21 million. Management cited lower sales and the write-off associated with exiting Global Mark, partly offset by higher margins. The three-month net loss widened to $395,512 from $370,247.
- Operating cash flow decreased to $1.23 million from $2.45 million. Cash increased slightly to $7.62 million. Receivables and inventories declined from fiscal year-end, while accounts payable and accrued expenses also fell substantially.
- The company withdrew from its 40% Global Mark investment after the venture failed to develop a significant customer base beyond Coffee Holding. It received cash, receivables, inventory, and settlement of payables; the equity-method investment balance fell from $1.93 million to $98,913. The final recovery was approximately $104,000 below the expected amount, resulting in a write-down.
Outlook, risks, and other notable matters
The filing provides no quantified earnings or revenue guidance. Management describes continued efforts to grow sales and improve margins, including through roasted coffee and branded products. It expects to continue using coffee futures and options to partially manage price exposure, but says hedging cannot eliminate commodity-price or supply risk. Six-month commodity contract results included a net loss of approximately $1.32 million; these trading instruments can increase earnings volatility.
Customer concentration is significant: one customer represented approximately 57% of six-month sales and $5.01 million of receivables at April 30; that customer represented 62% of quarterly sales. Four vendors supplied approximately 64% of six-month purchases. Other stated risks include coffee-price and supply volatility, customer retention, competition, financing and covenant compliance, and execution of growth initiatives. Management reported effective disclosure controls and no material change in internal control over financial reporting. No material legal proceedings or material risk-factor changes were reported.
Important facts for investors to verify
- Whether sales volumes, particularly wholesale green coffee volumes, stabilize and whether the improved six-month gross margin is sustainable.
- The major-customer concentration, its receivable balance, and the company’s ability to collect amounts due.
- Current coffee futures exposure and the effect of commodity-price movements on cost of sales; the filing gives differing fair-market-price figures in separate disclosures, so the applicable April 30 value is not clear from the filing text.
- The final value and recoverability of assets received from Global Mark, given the recorded write-down and remaining investment balance.
- Liquidity and covenant headroom under the secured revolving credit facility, including its February 2014 expiration.