Vita Coco Company, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Unaudited results; financial amounts below are in U.S. dollars and millions unless noted.
Business context
Vita Coco develops, markets and distributes branded coconut water and other beverages, as well as private-label products. It reports Americas and International segments. The business relies on third-party manufacturers and has an asset-light supply chain.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $138.1 | $124.0 | $387.5 | $335.8 |
| Gross profit | $56.2 | $32.6 | $140.9 | $80.9 |
| Gross margin | 40.7% | 26.3% | 36.4% | 24.1% |
| SG&A | $32.6 | $24.0 | $89.9 | $73.0 |
| Operating income | $23.5 | $8.6 | $51.1 | $7.9 |
| Net income | $15.2 | $7.3 | $39.9 | $10.6 |
| Diluted EPS | $0.26 | $0.13 | $0.68 | $0.19 |
| Operating cash flow | Not presented by quarter | Not presented by quarter | $70.0 | $(18.2) |
- Sales rose 11.3% in Q3 and 15.4% year to date. Case-equivalent volume grew 12.2% and 12.9%, respectively. Branded pricing supported year-to-date growth; private-label price/mix was a partial offset.
- Gross margin expansion reflected lower ocean-freight and domestic-logistics costs, volume growth and branded pricing. SG&A increased 36.3% in Q3 and 23.1% year to date, chiefly from personnel and marketing costs.
- Operating margin was approximately 17.0% in Q3 versus 6.9% in the prior-year quarter, and 13.2% year to date versus 2.4%.
- Q3 other expense included a $4.0 million unrealized derivative loss; for the nine months, derivative results were a $1.8 million loss versus a $6.4 million gain in 2022. These mark-to-market results affected reported earnings.
- Adjusted EBITDA, a non-GAAP measure, was $26.9 million for Q3 and $59.9 million year to date, versus $11.8 million and $16.2 million. Adjustments include stock compensation, currency and derivative results, and other items; see the filing reconciliation.
Balance sheet, cash flow and liquidity
- At September 30, cash and cash equivalents were $94.9 million, compared with $19.6 million at December 31, 2022. Current assets were $247.3 million and current liabilities $74.0 million; working capital was approximately $173.3 million.
- Nine-month operating cash flow of $70.0 million reflected higher earnings and working-capital changes, including a $33.8 million inventory reduction; accounts receivable used $37.2 million of cash. Investing cash outflow was $0.5 million.
- Total liabilities were $75.9 million. Debt was immaterial: $30,000 of vehicle loans and no borrowings under the $60 million revolving credit facility, which matures May 2026. The company reported compliance with its financial covenants.
- Management said cash, expected operating cash flow and facility availability should cover anticipated needs for at least 12 months from issuance of the statements.
Outlook, risks and notable items
- No numerical earnings or sales guidance is provided in the filing. Management expects SG&A to increase in absolute dollars and gross margin to fluctuate with product mix, promotions, manufacturing and commodity costs, warehousing and transport.
- A major private-label customer had been expected to transition away from coconut water and coconut oil supply; at the customer’s request, Vita Coco now expects to supply a significant portion of its private-label coconut water needs through 2024.
- Two customers represented 51% of nine-month sales and 51% of accounts receivable at September 30. Two suppliers each accounted for at least 10% of nine-month purchases. The company noted sourcing and geopolitical risks in South America and Southeast Asia.
- Foreign-exchange contracts had $111.2 million total notional value. The company estimated a 10% U.S. dollar move could result in approximately $4.6 million of gain or loss on derivatives. Inflationary pressure remained on labor, manufacturing and other costs, although transportation rates had fallen from recent peaks.
- The company recorded a $0.4 million impairment on the Ecuador farm asset after reclassifying it as held and used. It reported no material pending legal proceedings and no material changes to its previously disclosed risk factors.
- On October 30, 2023, the board authorized repurchases of up to $40 million of common stock. The program may be suspended or discontinued; the company’s timing and extent of purchases were not specified. A May secondary offering involved shares sold by a stockholder, and the company received no proceeds.
Key facts for investors to verify
- Whether gross-margin gains from lower freight costs and pricing persist as transportation, input and promotional conditions change.
- Sales and receivables exposure to the two large customers, including the scale and economics of the private-label supply extension through 2024.
- Working-capital trends, especially receivables growth and inventory movements, and their effect on operating cash flow.
- Derivative and currency exposure, including the impact of mark-to-market volatility on reported earnings.
- Any share repurchases under the $40 million authorization and their funding and impact on share count.