Vita Coco Company, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022; comparative figures are for the corresponding 2021 periods. Unaudited. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions unless otherwise noted.
Business context
Vita Coco develops, markets and distributes branded coconut water and other beverages, as well as private-label products. Its two reporting segments are Americas and International. The company relies on third-party manufacturers, co-packers and distributors and describes its supply chain as asset-light.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $124.0m | $115.7m | $335.8m | $292.9m |
| Gross profit | $32.6m | $38.5m | $80.9m | $91.6m |
| Gross margin | 26.3% | 33.3% | 24.1% | 31.3% |
| Operating income | $8.6m | $17.8m | $7.9m | $29.7m |
| Net income | $7.3m | $13.0m | $10.6m | $22.4m |
| Diluted EPS | $0.13 | $0.24 | $0.19 | $0.42 |
| Adjusted EBITDA (non-GAAP) | $11.8m | $20.6m | $16.2m | $36.3m |
Q3 sales increased 7.2%; nine-month sales increased 14.6%. Growth was led by Vita Coco coconut water, supported by higher case-equivalent volume and pricing actions. Q3 Americas sales rose 7.8%, while International sales rose 3.5%; nine-month International sales were essentially flat. Private-label sales declined in Q3, and the company said it was simplifying its “Other” product assortment.
Despite sales growth, gross profit fell 15.4% in Q3 and 11.6% for the nine-month period. Management attributed the margin pressure primarily to increased ocean freight and domestic transportation costs. The company estimated incremental cost-of-goods pressure, on a rate/mix basis versus prior-year periods, of approximately $7m in Q3 and $28m for the nine months. SG&A increased 15.9% in Q3 and 18.0% for the nine months, reflecting marketing, personnel, insurance and public-company costs.
Other income included unrealized derivative gains of $1.0m in Q3 and $6.4m for the nine months, versus a Q3 loss of $2.0m and nine-month gain of $1.3m in 2021. These mark-to-market gains supported reported pre-tax results and may fluctuate. Q3 income before taxes was $9.1m; nine-month income before taxes was $13.6m.
Cash flow, debt and liquidity
- Operating activities used $18.2m of cash in the first nine months, compared with $16.4m used in 2021. Investing activities used $0.9m, principally for property and equipment.
- Cash declined $7.5m from year-end 2021 to $21.2m at September 30, 2022. Financing activities provided $12.2m, including $22.0m of credit-facility borrowings and $12.5m of repayments.
- Debt was $9.6m, including $9.5m drawn on the $60m revolving credit facility; $50.5m remained available. The facility matures in May 2026, bears variable rates and is secured by substantially all company assets. The company reported compliance with its financial covenants.
- Current assets were $190.9m and current liabilities $65.1m at quarter-end. Management stated that cash, expected operating cash flows and available credit were sufficient for anticipated needs for at least 12 months from issuance of the statements.
Outlook, risks and unusual items
The filing provides no specific financial guidance. Management said it could not determine the overall future effects of inflation, supply-chain disruption, COVID-19 or geopolitical instability. It noted that a stronger U.S. dollar generally helps supply-chain activities but reduces reported international revenue. Management did not consider current elevated transportation costs representative of costs in a normal supply-chain environment.
Key risks include dependence on third-party manufacturers and suppliers, customer concentration, freight and other inflation, foreign-exchange movements, inventory forecasting, and consumer demand. Two customers together represented 55% of nine-month sales and 49% of receivables at September 30. Two suppliers represented 29% of purchases for the nine months.
The company recorded a $0.6m impairment on an Ecuador farm and related assets committed for sale; the remaining held-for-sale asset was $0.5m. The assets relate to Runa guayusa sourcing, which the company said can be obtained through alternatives. The company expected no payment under the Runa acquisition earn-out and planned to remeasure it through December 2022. It reported no material legal proceedings or material changes to previously disclosed risk factors. Disclosure controls were deemed effective.
Most important facts for investors to verify
- Whether pricing, volume and any easing in freight and logistics costs can restore gross margins after the year-over-year decline.
- How much future earnings depend on volatile unrealized foreign-exchange derivative gains; nine-month operating income was $7.9m versus net income of $10.6m.
- Working-capital and cash-flow trends, including the $18.2m operating cash outflow and elevated receivables, alongside the company’s stated liquidity outlook.
- Exposure to the two customers responsible for 55% of sales, and the continuing availability and cost of concentrated suppliers.
- Progress and proceeds, if any, from sale of the Ecuador assets, and the final outcome of the Runa earn-out assessment.