Westrock Coffee Company — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparative period is Q1 2022. Westrock supplies coffee, tea, flavors, extracts, and ingredients through Beverage Solutions and Sustainable Sourcing & Traceability (SS&T). Amounts below are in U.S. dollars; financial statement amounts are generally in millions.
Financial performance and position
| Metric | Q1 2023 | Q1 2022 / prior date |
|---|---|---|
| Net sales | $205.4 million | $186.4 million |
| Gross profit / margin | $34.3 million / 16.7% | $38.4 million / 20.6% |
| Operating income (loss) | $(7.4) million | $0.8 million |
| Net loss | $(4.3) million | $(4.7) million |
| Net loss attributable to common shareholders | $(4.8) million | $(11.6) million |
| Adjusted EBITDA (non-GAAP) | $8.5 million; 4.1% margin | $11.4 million; 6.1% margin |
| Cash used in operating activities | $(25.1) million | $(38.4) million |
| Capital expenditures | $19.6 million | $8.7 million |
| Cash and restricted cash, March 31 | $25.6 million | $18.2 million |
| Total debt, March 31 | $270.0 million | $219.7 million at December 31, 2022 |
Revenue rose 10.2%, but gross profit fell about 10.8% as costs of sales grew faster than sales. Beverage Solutions revenue increased about 22%, supported by a 44% increase in single-serve cup volume and higher pricing. SS&T sales, net of intersegment revenue, fell about 36%; management attributed the decline to lower customer demand, with volume down 57%. Interest expense declined to $6.0 million from $8.0 million. The $5.5 million noncash gain from remeasuring warrant liabilities helped reduce the reported net loss; it is not operating revenue.
At March 31, current assets were $310.3 million and current liabilities were $194.4 million. Debt included a $170.6 million term loan, $55.0 million drawn on the revolving facility, and $42.9 million of short-term debt. The revolving facility has a $175 million commitment, with $2.6 million of standby letters of credit outstanding; actual availability is subject to the credit agreement. The separate $70 million Falcon trade finance facility is uncommitted and repayable on demand; $35.0 million was outstanding under it. The company reported compliance with its financial covenants at quarter-end.
Material changes and notable items
- Gross margin declined 3.9 percentage points, and Adjusted EBITDA fell about 25.8% year over year despite higher sales.
- Q1 investing cash outflow increased to $22.0 million from $7.8 million, mainly reflecting $19.6 million of property and equipment additions. Financing activities provided $46.4 million, including $106.7 million of debt proceeds and $56.4 million of debt repayments.
- Acquired substantially all of Bixby Roasting Co. assets on February 28 for approximately $2.6 million, including cash and shares. Bixby’s results were not material in the quarter. The Kohana acquisition’s purchase-price allocation remained preliminary.
- On April 3, after quarter-end, Westrock bought the remaining 15% of Falcon for $3.2 million, comprising $2.0 million cash and 100,000 shares.
- Q1 included $6.6 million of acquisition, restructuring, and integration expense, including approximately $6.1 million related to ERP implementation and support. Conway facility start-up costs were $1.9 million and were excluded from Adjusted EBITDA.
Outlook, liquidity, risks, and controls
- Management expects cash from operations and available borrowings to fund operations for at least the next 12 months, but notes that persistent inflation, slower demand, delayed customer price pass-throughs, or weaker cash generation could constrain liquidity and covenant compliance. Management said it may raise capital, defer growth investment, or reduce operating costs if needed.
- The company expects approximately $275 million of capital expenditures over three years for its Conway, Arkansas extract and ready-to-drink facility; approximately $40 million had been spent by March 31. It believes cash generation and available facilities will fund completion, but may delay or modify the project if liquidity proves insufficient. The filing does not provide a clear commercial production start date.
- Inventory purchase commitments were $278.4 million for the next 12 months; the company also had $10.2 million of inventory repurchase obligations. A supplier finance program begun in March had no outstanding balance at quarter-end.
- Series A preferred shares have a $11.50 initial liquidation preference and potential holder redemption rights after February 26, 2028. Assuming all 23.6 million shares remain outstanding and the preference stays at $11.50, the company estimates aggregate redemption payments of at least approximately $271 million, subject to applicable restrictions and actual terms.
- Management identified material weaknesses in financial reporting controls, including risk assessment, period-end reporting, segregation of duties, and IT general controls. Disclosure controls were deemed ineffective as of March 31. Remediation is ongoing; the company implemented NetSuite during Q1, with further rollout expected through the year.
- Key risks include commodity and input-cost volatility, supply availability, customer demand, facility construction and execution, access to capital, debt and covenant obligations, and the ability to remediate control weaknesses. Management stated ordinary-course legal matters were not expected to materially affect financial position, results, or liquidity.
Most important facts for investors to verify
- Whether Beverage Solutions growth and single-serve volume can offset weaker SS&T demand and recover gross margin and Adjusted EBITDA.
- Cash burn, working-capital needs, debt balances and rates, Falcon facility availability and demand-repayment terms, and covenant headroom.
- Conway project costs, timing, funding sources, and commercial production progress against the $275 million three-year investment estimate.
- Progress in remediating material weaknesses and the effectiveness of controls as NetSuite implementation continues.
- Final Kohana purchase accounting, Bixby integration performance, and the cash and dilution effects of acquisitions and preferred-share terms.