Westrock Coffee Company — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Unaudited; amounts below are in millions unless stated otherwise. Westrock supplies coffee, tea, flavors, extracts and ingredients through Beverage Solutions and Sustainable Sourcing & Traceability (SS&T). It completed its de-SPAC merger and became a public corporation on August 26, 2022; the financial statements treat the transaction as an equity transaction, not a business combination.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $230.3 | $181.3 | $640.1 | $507.8 |
| Gross profit | $41.1 | $38.3 | $118.5 | $105.8 |
| Gross margin | 17.9% | 21.1% | 18.5% | 20.8% |
| Operating income | $5.5 | $4.0 | $7.6 | $5.8 |
| Net loss | $(13.0) | $(3.9) | $(23.5) | $(16.1) |
| Net loss attributable to common shareholders | $(20.2) | $(10.1) | $(44.7) | $(34.5) |
| Adjusted EBITDA | $17.9 | $13.5 | $42.6 | $33.0 |
| Basic and diluted loss per share | $(0.41) | $(0.29) | $(1.12) | $(1.00) |
Adjusted EBITDA is a non-GAAP measure. Management’s definition excludes, among other items, acquisition and integration costs, equity compensation, warrant fair-value changes and certain mark-to-market items.
- Revenue and margins: Q3 sales rose 27% year over year, while gross margin fell 3.2 percentage points. Management attributed growth to single-serve volume and higher green coffee prices; higher commodity, materials and labor costs weighed on margins. Q3 single-serve cup volume increased 59%, while roast-and-ground coffee volume declined 9%. SS&T sales volume decreased about 3%, despite higher average selling prices.
- Cash flow: Operating cash use was $59.5 for the first nine months, versus $8.2 used in 2021, mainly reflecting increased working capital and inventory. Investing cash use was $19.8, including $23.0 of property and equipment additions. Financing provided $152.2, including de-SPAC and PIPE proceeds. Cash and cash equivalents were $91.0 at quarter end; including restricted cash, the total was $95.5.
- Liquidity: Current assets were $380.1 and current liabilities $226.4 (working capital of $153.7). The $175.0 revolving facility was undrawn, except for $2.6 of standby letters of credit. Management stated it believed liquidity was sufficient for foreseeable needs.
- Debt and capital: Total debt was $241.4, including $61.8 of short-term international trade finance debt; long-term debt, net, was $164.7. The new $175.0 term loan and $175.0 revolving facility mature in August 2027; the term loan rate was 5.7% at September 30. The company reported compliance with its leverage and interest-coverage covenants. The balance sheet also included $273.6 of Series A convertible preferred shares, with a $11.50 initial liquidation preference per share.
Material changes and significant items
- Q3 net loss increased to $13.0 from $3.9. Interest expense rose to $13.4 from $8.6, including $4.3 of deferred financing fee write-offs and a $1.6 early termination fee related to retired debt. The company also recorded a $5.2 loss from the fair-value change in warrant liabilities.
- For the first nine months, sales increased 26% and Adjusted EBITDA increased 29%; gross margin declined 2.3 percentage points. Higher commodity prices contributed to sales growth and costs, while SS&T sales volumes were slightly lower.
- The August de-SPAC and PIPE financing generated approximately $255.7 of cash proceeds. Proceeds and the new term loan were used to repay prior term-loan and asset-based facilities and pay transaction and financing costs. The transaction substantially changed the company’s equity and debt structure.
- Inventory increased to $162.2 from $109.2 at December 31, 2021, contributing to working-capital cash use. Inventory purchase commitments were $284.6 for the next 12 months.
Outlook, risks and controls
- No quantified revenue, earnings or Adjusted EBITDA guidance is provided. Westrock expects approximately $275 million of capital expenditures over three years for an expanded Conway, Arkansas, extract and ready-to-drink facility build-out. Management said it may delay or modify the project or reprioritize growth plans if liquidity proves insufficient.
- Management cited inflation in ingredients, packaging and labor, commodity-price volatility, supply-chain disruption and the lag between cost increases and customer price increases. Other stated risks include raw-material availability, customer concentration or loss, facility disruption, climate impacts, debt and covenant capacity, and execution of the Conway project.
- Disclosure controls and procedures were deemed ineffective at September 30, 2022 because of outstanding material weaknesses in risk assessment, accounting for complex or unusual transactions, period-end reporting, segregation of duties and IT general controls. Management described remediation measures, but the weaknesses had not been resolved.
- On November 14, 2022, Westrock acquired Kohana Coffee, an extract and ready-to-drink business, for approximately $15.5 in cash and 1,852,608 common shares, subject to customary adjustments. Purchase accounting and related disclosures were incomplete in this filing.
- Management said ordinary-course legal matters were not expected to have a material adverse effect. The filing also states the company had not filed all reports required during the preceding 12 months, consistent with its recent transition to public-company reporting.
Important facts for investors to verify
- Whether Westrock can pass commodity, packaging and labor cost increases through to customers without further gross-margin pressure.
- Working-capital needs, inventory levels and operating cash use, alongside the large near-term inventory purchase commitments.
- Liquidity available for the approximately $275 million Conway build-out, debt service and covenant compliance as spending progresses.
- Progress and independent validation of remediation of the disclosed material weaknesses in financial reporting and IT controls.
- The final Kohana purchase-price allocation, integration costs and contribution to results, plus the dilution and future economics of preferred shares and warrants.