Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations describes the principal factors affecting the results of operations, financial condition, and changes in financial condition for the three nine months ended September 30, 2023. This discussion should be read in conjunction with the accompanying Condensed Consolidated Financial Statements, and the notes thereto set forth in Part I, Item 1 of this Quarterly Report on Form 10-Q and our December 31, 2022 Audited Consolidated Financial Statements and notes thereto included in our Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (“SEC”) on March 21, 2023.
Overview
Westrock Coffee Company, a Delaware corporation (the “Company,” “Westrock,” “we,” “us,” or “our”), is a leading integrated coffee, tea, flavors, extracts, and ingredients solutions provider in the United States, providing coffee sourcing, supply chain management, product development, roasting, packaging, and distribution services to the retail, food service and restaurant, convenience store and travel center, non-commercial account, CPG, and hospitality industries around the world.
Our platform is built upon four fundamental pillars that enable us to positively impact the coffee, tea, flavors, extracts, and ingredients ecosystems from crop to cup: (i) we operate a fully transparent supply chain, (ii) we develop innovative beverage solutions tailored to our customers’ specific needs, (iii) we deliver a high quality and comprehensive set of products to our customers, and (iv) we leverage our scaled international presence to serve our blue-chip customer base. These four tenets comprise the backbone of our platform and position us as a leading provider of value-added beverage solutions. By partnering with Westrock, our customers also benefit from the benchmark-setting responsible sourcing policies and strong Environmental, Social, and Governance focus surrounding our products, top tier consumer insights, and a differentiated product ideation process. Leading brands choose us because we are singularly positioned to meet their needs, while simultaneously driving a new standard for sustainably and responsibly sourced products.
We operate our business in two segments: Beverage Solutions and Sustainable Sourcing & Traceability (“SS&T”).
Beverage Solutions : Through this segment, we combine our product innovation and customer insights to provide value-added beverage solutions, including coffee, tea, flavors, extracts, and ingredients. We provide products in a variety of packaging, including branded and private label coffee in bags, fractional packs, and single serve cups, as well as extract solutions to be used in products such as cold brew and ready-to-drink offerings. Currently, we serve customers in the United States, Europe, and Asia through the retail, food service and restaurant, convenience store and travel center, non-commercial account, CPG and hospitality industries.
Sustainable Sourcing & Traceability : Through this segment, we utilize our proprietary technology and digitally traceable supply chain to directly impact and improve the lives of our farming partners, tangible economic empowerment and an emphasis on environmental accountability and farmer literacy. Revenues primarily relate to the physical delivery and settlement of forward sales contracts for green coffee.
Key Business Metrics
We use Adjusted EBITDA to evaluate our performance, identify trends, formulate financial projections, and to make strategic decisions.
Adjusted EBITDA
We refer to EBITDA and Adjusted EBITDA in our analysis of our results of operations, which are not required by, or presented in accordance with, accounting principles generally accepted in the United States (“GAAP”). While we believe that net (loss) income, as defined by GAAP, is the most appropriate earnings measure, we also believe that EBITDA and Adjusted EBITDA are important non-GAAP supplemental measures of operating performance as they contribute to a meaningful evaluation of the Company’s future operating performance and comparisons to the Company’s past operating performance. Additionally, we use these non-GAAP financial measures in evaluating the
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performance of our segments, to make operational and financial decisions and in our budgeting and planning process. The Company believes that providing these non-GAAP financial measures to investors helps investors evaluate the Company’s operating performance, profitability and business trends in a way that is consistent with how management evaluates such performance.
We define “EBITDA” as net (loss) income, as defined by GAAP, before interest expense, net, provision for income taxes and depreciation and amortization. We define “Adjusted EBITDA” as EBITDA before equity-based compensation expense and the impact, which may be recurring in nature, of acquisition, restructuring and integration related costs, including management services and consulting agreements entered into in connection with the acquisition of S&D Coffee, Inc., impairment charges, changes in the fair value of warrant liabilities, non-cash mark-to-market adjustments, certain costs specifically excluded from the calculation of EBITDA under our material debt agreements, such as facility start-up costs, the write off of unamortized deferred financing costs, costs incurred as a result of the early repayment of debt, gains or losses on dispositions, and other similar or infrequent items (although we may not have had such charges in the periods presented). We believe EBITDA and Adjusted EBITDA are important supplemental measures to net (loss) income because they provide additional information to evaluate our operating performance on an unleveraged basis. In addition, Adjusted EBITDA is calculated similar to defined terms in our material debt agreements used to determine compliance with specific financial covenants.
Since EBITDA and Adjusted EBITDA are not measures calculated in accordance with GAAP, they should be viewed in addition to, and not be considered as alternatives for, net (loss) income determined in accordance with GAAP. Further, our computations of EBITDA and Adjusted EBITDA may not be comparable to that reported by other companies that define EBITDA and Adjusted EBITDA differently than we do.
The reconciliation of our net loss to EBITDA and Adjusted EBITDA for the three and nine months ended September 30, 2023 and 2022 is as follows:
Three Months Ended September 30,
Nine Months Ended September 30,
(Thousands)
2023
2022
2023
2022
Net income (loss)
$
16,621
$
(13,018)
$
(14,516)
$
(23,542)
Interest expense, net
7,803
13,404
21,216
30,265
Income tax expense (benefit)
(5,212)
(428)
(3,331)
(3,511)
Depreciation and amortization
6,364
5,816
18,419
17,782
EBITDA
25,576
5,774
21,788
20,994
Acquisition, restructuring and integration expense
3,137
3,959
12,682
8,746
Change in fair value of warrant liabilities
(25,105)
5,215
(18,833)
5,215
Management and consulting fees (S&D Coffee, Inc. acquisition)
—
834
556
3,035
Equity-based compensation
2,439
705
6,297
1,184
Conway extract and ready-to-drink facility start-up costs
3,035
—
6,615
—
Mark-to-market adjustments
1,160
543
(1,045)
793
Loss on disposal of property, plant and equipment
248
459
1,145
748
Other
1,105
424
2,153
1,885
Adjusted EBITDA
$
11,595
$
17,913
$
31,358
$
42,600
Beverage Solutions
9,884
15,885
29,965
38,776
Sustainable Sourcing & Traceability
1,711
2,028
1,393
3,824
Total of Reportable Segments
$
11,595
$
17,913
$
31,358
$
42,600
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Significant Developments
On June 29, 2023, the Company entered into a subscription agreement (the “Subscription Agreement”) with HF Direct Investments Pool, LLC (the “HF Investor”), an affiliate of HF Capital, LLC, pursuant to which the Company agreed to sell and issue to the HF Investor and the HF Investor agreed to purchase from the Company 5,000,000 shares (the “HF Subscription Amount”) of common stock, par value $0.01 per share (the “Common Shares”), of the Company at a purchase price per share of $10.00 for aggregate gross proceeds to the Company of $50.0 million (such transaction, the “HF Investment”).
The Subscription Agreement also provides that following the Closing, the HF Investor shall have the right to designate one (1) director to the board of directors of the Company (the “Board”), subject to the terms and conditions of the Amended and Restated Investor Rights Agreement (as defined below). As of the date of this Quarterly Report on Form 10-Q, the HF Investor has not exercised the right to designate a director to the Board.
Additionally, on June 29, 2023 and July 18, 2023, the Company entered into definitive agreements with an affiliate of the Herbert Hunt family (the “Hunt Investor”) and the Arkansas Teacher Retirement System (the “ARTRS” and together with the Hunt Investor, the “Investors”), respectively, pursuant to which the Company agreed to sell and issue to the Investors and the Investors agreed to purchase from the Company a total of 5,000,000 Common Shares of the Company at a purchase price per share of $10.00 for aggregate gross proceeds to the Company of $50.0 million (such transactions the “PIPE Investments”).
On August 3, 2023, the Company closed the HF Investment and PIPE Investments, issuing 10.0 million Common Shares, receiving aggregate gross proceeds of $100.0 million.
In connection with the HF Investment, the HF Investor and the current parties to that certain Investor Rights Agreement, dated April 4, 2022 (the “Investor Rights Agreement”), by and among the Company, affiliates of Brown Brothers Harriman & Co. (the “BBH Investors”), and the other parties thereto entered into an amendment and restatement of the Investor Rights Agreement (the “Amended and Restated Investor Rights Agreement”), which became effective upon closing of the HF Investment. Among other things, the Amended and Restated Investor Rights Agreement amended the Investor Rights Agreement to provide the HF Investor with the right to designate one (1) director to Class II of the Board, subject to the HF Investor (together with certain affiliates) owning at least 5% of the capital stock of the Company and the other terms and conditions set forth therein.
The HF Investment and PIPE Investments were subject to the potential exercise of preemptive rights (the “BBH Preemptive Rights”) of the BBH Investors to subscribe up to their pro-rata ownership of the capital stock of the Company, under the terms of that certain Investor Rights Agreement. On July 24, 2023, the BBH Investors exercised the BBH Preemptive Rights to purchase approximately 1.9 million Common Shares at a purchase price per share of $10.00, under the terms of the Investor Rights Agreement. On August 7, 2023, the Company sold and issued the Common Shares to the BBH Investors, receiving aggregate gross proceeds of approximately $18.8 million.
The issuance of Common Shares pursuant to the HF Investment, PIPE Investments and BBH Preemptive Rights, is intended to be exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”), by virtue of the exemption provided by Rule 506(b) of Regulation D promulgated under the Securities Act.
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Results of Operations
Comparison of the Three Months Ended September 30, 2023 and 2022
The following table sets forth our results of operations expressed as dollars and as a percentage of total revenues for the periods indicated:
Three Months
Three Months
Ended
% of
Ended
% of
(Thousands)
September 30, 2023
Revenues
September 30, 2022
Revenues
Net sales
$
219,612
100.0
%
$
230,308
100.0
%
Costs of sales
184,546
84.0
%
189,169
82.1
%
Gross profit
35,066
16.0
%
41,139
17.9
%
Selling, general and administrative expense
37,050
16.9
%
31,223
13.6
%
Acquisition, restructuring and integration expense
3,137
1.4
%
3,959
1.7
%
Loss on disposal of property, plant and equipment
248
0.1
%
459
0.2
%
Total operating expenses
40,435
18.4
%
35,641
15.5
%
Income (loss) from operations
(5,369)
(2.4)
%
5,498
2.4
%
Other (income) expense
Interest expense, net
7,803
3.6
%
13,404
5.8
%
Change in fair value of warrant liabilities
(25,105)
(11.4)
%
5,215
2.3
%
Other, net
510
0.2
%
325
0.1
%
Income (loss) before income taxes and equity in earnings from unconsolidated entities
11,423
5.2
%
(13,446)
(5.8)
%
Income tax expense (benefit)
(5,212)
(2.4)
%
(428)
(0.2)
%
Equity in (earnings) loss from unconsolidated entities
14
0.0
%
—
0.0
%
Net income (loss)
$
16,621
7.6
%
$
(13,018)
(5.7)
%
Net income (loss) attributable to non-controlling interest
—
0.0
%
(22)
(0.0)
%
Net income (loss) attributable to shareholders
16,621
7.6
%
(12,996)
(5.6)
%
Participating securities' share in earnings
(3,912)
(1.8)
%
—
0.0
%
Accretion of Series A Convertible Preferred Shares
93
0.0
%
—
0.0
%
Loss on extinguishment of Redeemable Common Equivalent Preferred Units, net
—
0.0
%
(2,870)
(1.2)
%
Common equivalent preferred dividends
—
0.0
%
(4,380)
(1.9)
%
Accumulating preferred dividends
—
0.0
%
—
0.0
%
Net income (loss) attributable to common shareholders
$
12,802
5.8
%
$
(20,246)
(8.8)
%
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The following table sets forth selected financial information of our reportable segments for the three months ended September 30, 2023 and 2022:
Sustainable
Total of
Beverage
Sourcing &
Intersegment
Reportable
(Thousands)
Solutions
Traceability
Revenues (1)
Segments
Segment Revenues:
2023
$
176,818
$
44,098
$
(1,304)
$
219,612
2022
173,486
62,809
(5,987)
230,308
Segment Costs of Sales:
2023
144,920
39,626
n/a
184,546
2022
136,366
52,803
n/a
189,169
Segment Gross Profit:
2023
31,898
3,168
n/a
35,066
2022
37,120
4,019
n/a
41,139
Segment Adjusted EBITDA:
2023
9,884
1,711
n/a
11,595
2022
15,885
2,028
n/a
17,913
Segment Adjusted EBITDA Margin:
2023
5.6
%
4.0
%
n/a
5.3
%
2022
9.2
%
3.6
%
n/a
7.8
%
(1)
Intersegment revenues represent sales of green coffee from our SS&T segment to our Beverage Solutions segment.
Net Sales
Net Sales from our Beverage Solutions segment were $176.8 million for the three months ended September 30, 2023, compared to $173.5 million for the three months ended September 30, 2022, an increase of approximately 1.9%. The increase was primarily due to an $18.2 million increase in the sale of flavors, extracts and ingredients products, which was primarily driven by the acquisition of Kohana Coffee, LLC (“Kohana”) and a 43.6% increase in non-Kohana manufactured extracts volumes, partially offset by a $14.9 million decrease in the sale of coffee and tea products, which was driven by a 10.8% decrease in roast and ground coffee volumes and a 12.9% decrease in single serve cup volumes compared to the three months ended September 30, 2022.
Net Sales from our SS&T segment, net of intersegment revenues, totaled $42.8 million for the three months ended September 30, 2023, decreasing 24.7% compared to $56.8 million for the three months ended September 30, 2022. The decrease is driven by a decrease in sales volume, as a result of a decrease in customer demand, which decreased 19.0% for the three months ended September 30, 2023 compared to the three months ended September 30, 2022.
Costs of Sales
In our Beverage Solutions segment, costs of sales increased to $144.9 million for the three months ended September 30, 2023, from $136.4 million for the three months ended September 30, 2022. The increase in costs of sales was primarily driven by an increase in costs related to the acquisition of Kohana for the three months ended September 30, 2023 compared to the three months ended September 30, 2022.
In our SS&T segment, costs of sales decreased $13.2 million to $39.6 million for the three months ended September 30, 2023 compared to the three months ended September 30, 2022. This decrease is primarily due to a decrease in green coffee sales volume. Costs of sales in our SS&T segment for the three months ended September 30, 2023 included $1.2 million of net unrealized losses on forward sales and purchase contracts and mark-to-market adjustments on green coffee inventory compared to $0.5 million of net unrealized losses for the three months ended September 30, 2022.
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Selling, General and Administrative Expense
Three Months Ended September 30,
2023
2022
% of Segment
% of Segment
(Thousands)
Amount
Revenues
Amount
Revenues
Beverage Solutions
$
34,577
19.6
%
$
28,823
16.6
%
Sustainable Sourcing & Traceability
2,473
5.8
%
2,400
4.2
%
Total selling, general and administrative expense
$
37,050
16.9
%
$
31,223
13.6
%
Total selling, general and administrative expenses in our Beverage Solutions segment increased $5.8 million to $34.6 million for the three months ended September 30, 2023, compared to the three months ended September 30, 2022. The increase is primarily due to a $3.0 million increase in expenses associated with the start-up of our extract and ready-to-drink facility in Conway, Arkansas compared to no such expenses during the three months ended September 30, 2022. Additionally, during the three months ended September 30, 2023, the Company incurred approximately $2.4 million in expenses related to equity-based compensation compared to $0.7 million of such expenses during the three months ended September 30, 2022. In our SS&T segment, selling, general and administrative costs were relatively unchanged compared to the three months ended September 30, 2022.
Acquisition, Restructuring and Integration Expense
Acquisition, restructuring and integration expenses for the three months ended September 30, 2023 were $3.1 million, approximately $1.2 million of which related to the costs associated with the integration of our new enterprise resource planning system, including internal and external costs related to post go-live system support and duplicative systems costs and $1.0 million of which primarily related to non-capitalizable costs associated with registration statements. During the three months ended September 30, 2022, we incurred $4.0 million of acquisition, restructuring and integration expenses, of which approximately $1.3 million related to the integration of our new enterprise resource planning system, $1.2 million related to public-company preparedness costs and $0.9 million related to startup costs for our Conway, Arkansas manufacturing facility.
Interest Expense, net
Three Months Ended September 30,
(Thousands)
2023
2022
Interest expense, net
Cash:
Term loan facility
$
4,276
$
1,020
Prior term loan facility
—
3,215
Prior term loan facility early termination fee
—
1,580
Revolving credit facility
684
—
Supply chain finance program
969
—
Prior ABL facility
—
966
Subordinated related party debt
—
241
International trade finance lines
1,195
1,065
International notes payable
33
260
Other
1,110
455
Total cash interest
8,267
8,802
Non-cash:
Amortization of deferred financing costs
571
304
Write-off of deferred financing costs
—
4,296
Payments-in-kind interest
—
2
Capitalized interest
(1,035)
—
Total non-cash interest
(464)
4,602
Total interest expense, net
$
7,803
$
13,404
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Interest expense, net for the three months ended September 30, 2023 was $7.8 million compared to $13.4 million for the three months ended September 30, 2022. The decrease is primarily due to the $4.3 million of unamortized deferred financing fees associated with the termination of our prior term loan facility and our prior ABL facility, and $1.6 million of early termination payments associated with the prior term loan facility that were incurred during the three months ended September 30, 2022. No such costs were incurred in the three months ended September 30, 2023. These decreases were partially offset by interest on the outstanding revolving credit facility and supply chain finance program borrowings. Furthermore, during the three months ended September 30, 2023, the Company capitalized approximately $1.0 million of interest costs associated with the build-out of our extract and ready-to-drink facility in Conway, Arkansas, while no such interest was capitalized during the three months ended September 30, 2022.
Change in Fair Value of Warrant Liabilities
Warrant liabilities are adjusted to fair value at each reporting period, with any change in fair value recognized in the Condensed Consolidated Statement of Operations. The change in fair value of warrant liabilities for the three months ended September 30, 2023 resulted in recognition of $25.1 million of gains compared to recognition of $5.2 million of losses during the three months ended September 30, 2022.
Income Tax Expense (Benefit)
Income tax benefit for the three months ended September 30, 2023 was $5.2 million, resulting in an effective tax rate of (45.7%). The effective tax rate for the current period differs from the federal statutory rate primarily due to an increase in the valuation allowance against domestic deferred tax assets and permanent differences, including nontaxable income related to a change in the fair value of warrants. Income tax benefit for the three months ended September 30, 2022 was $0.4 million, resulting in an effective tax rate of 3.2%.
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Comparison of the Nine Months Ended September 30, 2023 and 2022
The following table sets forth our results of operations expressed as dollars and as a percentage of total revenues for the periods indicated:
Nine Months Ended
% of
Nine Months Ended
% of
(Thousands)
September 30, 2023
Revenues
September 30, 2022
Revenues
Net Sales
$
649,748
100.0
%
$
640,149
100.0
%
Costs of sales
544,707
83.8
%
521,681
81.5
%
Gross profit
105,041
16.2
%
118,468
18.5
%
Selling, general and administrative expense
105,275
16.2
%
101,332
15.8
%
Acquisition, restructuring and integration expense
12,682
2.0
%
8,746
1.4
%
Loss on disposal of property, plant and equipment
1,145
0.2
%
748
0.1
%
Total operating expenses
119,102
18.3
%
110,826
17.3
%
Income (loss) from operations
(14,061)
(2.2)
%
7,642
1.2
%
Other (income) expense
Interest expense, net
21,216
3.3
%
30,265
4.7
%
Change in fair value of warrant liabilities
(18,833)
(2.9)
%
5,215
0.8
%
Other, net
1,323
0.2
%
(785)
(0.1)
%
Income (loss) before income taxes and equity in earnings from unconsolidated entities
(17,767)
(2.7)
%
(27,053)
(4.2)
%
Income tax expense (benefit)
(3,331)
(0.5)
%
(3,511)
(0.5)
%
Equity in (earnings) loss from unconsolidated entities
80
0.0
%
—
0.0
%
Net income (loss)
$
(14,516)
(2.2)
%
$
(23,542)
(3.7)
%
Net income (loss) attributable to non-controlling interest
15
0.0
%
43
0.0
%
Net income (loss) attributable to shareholders
(14,531)
(2.2)
%
(23,585)
(3.7)
%
Accretion of Series A Convertible Preferred Shares
(249)
(0.0)
%
—
0.0
%
Loss on extinguishment of Redeemable Common Equivalent Preferred Units, net
—
0.0
%
(2,870)
(0.4)
%
Common equivalent preferred dividends
—
0.0
%
(4,380)
(0.7)
%
Accumulating preferred dividends
—
0.0
%
(13,882)
(2.2)
%
Net income (loss) attributable to common shareholders
$
(14,780)
(2.3)
%
$
(44,717)
(7.0)
%
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The following table sets forth selected financial information of our reportable segments for the nine months ended September 30, 2023 and 2022:
Sustainable
Total of
Beverage
Sourcing &
Intersegment
Reportable
(Thousands)
Solutions
Traceability
Revenues (1)
Segments
Segment Revenues:
2023
$
547,746
$
105,537
$
(3,535)
$
649,748
2022
492,712
169,041
(21,604)
640,149
Segment Costs of Sales:
2023
452,878
91,829
n/a
544,707
2022
384,317
137,364
n/a
521,681
Segment Gross Profit:
2023
94,868
10,173
n/a
105,041
2022
108,395
10,073
n/a
118,468
Segment Adjusted EBITDA:
2023
29,965
1,393
n/a
31,358
2022
38,776
3,824
n/a
42,600
Segment Adjusted EBITDA Margin:
2023
5.5
%
1.4
%
n/a
4.8
%
2022
7.9
%
2.6
%
n/a
6.7
%
(1)
Intersegment revenues represent sales of green coffee from our SS&T segment to our Beverage Solutions segment.
Net Sales
Net Sales from our Beverage Solutions segment were $547.7 million for the nine months ended September 30, 2023, compared to $492.7 million for the nine months ended September 30, 2022, an increase of approximately 11.2%. The increase was primarily due to a $40.6 million increase in the sale of flavors, extracts and ingredients products, which was primarily driven by the acquisition of Kohana and a 16.6% increase in non-Kohana manufactured extracts volumes, a $16.3 million increase in the sale of coffee and tea products, driven by an 8.3% increase in single serve cup volumes, and increased pricing from the pass through of higher underlying green coffee prices during the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022.
Net Sales from our SS&T segment, net of intersegment revenues, totaled $102.0 million during the nine months ended September 30, 2023, decreasing 30.8% compared to $147.4 million during the nine months ended September 30, 2022. The decrease is driven by a 32% decrease in sales volume, as a result of a decrease in customer demand, for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022.
Costs of Sales
In our Beverage Solutions segment, costs of sales increased $68.6 million to $452.9 million for the nine months ended September 30, 2023, compared to $384.3 million for the nine months ended September 30, 2022. The increase in costs of sales was primarily driven by an increase in costs related to the acquisition of Kohana, increases in materials costs, and an increase in flavors, extracts and ingredients volume for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022.
In our SS&T segment, costs of sales decreased $45.5 million to $91.8 million for the nine months ended September 30, 2023 compared to $137.4 million for the nine months ended September 30, 2022. This decrease is primarily due to a decrease in green coffee sales volume. Costs of sales in our SS&T segment for the nine months ended September 30, 2023 included $1.0 million of net unrealized gains on forward sales and purchase contracts and mark-to-market adjustments on green coffee inventory compared to $0.8 million of net unrealized losses for the nine months ended September 30, 2022.
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Selling, General and Administrative Expense
Nine Months Ended September 30,
2023
2022
% of Segment
% of Segment
(Thousands)
Amount
Revenues
Amount
Revenues
Beverage Solutions
$
97,798
17.9
%
$
93,754
19.0
%
Sustainable Sourcing & Traceability
7,477
7.3
%
7,578
5.1
%
Total selling, general and administrative expense
$
105,275
16.2
%
$
101,332
15.8
%
Total selling, general and administrative expenses in our Beverage Solutions segment increased $4.0 million to $97.8 million for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022. The increase is primarily due to a $6.6 million increase in expenses associated with the start-up of our extract and ready-to-drink facility in Conway, Arkansas and a $5.1 million increase in equity-based compensation costs, partially offset by a $3.1 million decrease in freight costs, a $2.5 million decrease in management and consulting fees associated with the S&D Coffee, Inc. acquisition and a $1.5 million decrease in personnel-related expenses. In our SS&T segment, selling, general and administrative costs decreased $0.1 million, primarily due to a $0.2 million decrease in professional fees.
Acquisition, Restructuring and Integration Expense
Acquisition, restructuring and integration expenses for the nine months ended September 30, 2023 were $12.7 million, approximately $9.7 million of which related to the costs associated with the integration of our new enterprise resource planning system, including internal and external costs related to post go-live system support and duplicative systems costs and $2.0 million of non-capitalizable costs associated with acquisitions and registration statements. During the nine months ended September 30, 2022, we incurred $8.7 million of acquisition, restructuring and integration expenses, of which approximately $3.7 million related to public-company preparedness costs, $2.9 million related to the integration of our new enterprise resource planning system and $1.6 million related to equity-funded startup costs.
Interest Expense, net
Nine Months Ended September 30,
(Thousands)
2023
2022
Interest expense, net
Cash:
Term loan facility
$
10,180
$
1,020
Prior term loan facility
—
14,735
Prior term loan facility early termination fee
—
1,580
Revolving credit facility
2,841
—
Supply chain finance program
1,189
—
Prior ABL facility
—
2,414
Short-term related party debt
—
428
Subordinated related party debt
—
642
International trade finance lines
3,391
2,253
International notes payable
87
468
Other
3,003
784
Total cash interest
20,691
24,324
Non-cash:
Amortization of deferred financing costs
1,560
1,350
Write-off of deferred financing costs
—
4,296
Payments-in-kind interest
—
295
Capitalized interest
(1,035)
—
Total non-cash interest
525
5,941
Total interest expense, net
$
21,216
$
30,265
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Interest expense, net for the nine months ended September 30, 2023 was $21.2 million compared to $30.3 million for the nine months ended September 30, 2022. The decrease is primarily due to lower cash interest of $3.6 million on our outstanding borrowings, as well as the $4.3 million of unamortized deferred financing fees associated with the termination of the prior term loan facility and prior ABL facility, and $1.6 million of early termination payments associated with the prior term loan facility that were incurred during the three months ended September 30, 2022. No such costs were incurred in the three months ended September 30, 2023. The decrease in cash interest is due to a decrease in the amount of outstanding term loans under the Term Loan Facility (as defined below) compared to the prior term loan facility that was in place during the prior year. This decrease was partially offset by interest on the outstanding revolving credit facility and supply chain finance program borrowings for the nine months ended September 30, 2023 compared to no such interest during the nine months ended September 30, 2022. Furthermore, during the nine months ended September 30, 2023, the Company capitalized approximately $1.0 million of interest costs associated with the build-out of our extract and ready-to-drink facility in Conway, Arkansas, while no such interest was capitalized during the nine months ended September 30, 2022.
Change in Fair Value of Warrant Liabilities
The change in fair value of warrant liabilities for the nine months ended September 30, 2023 resulted in recognition of $18.8 million of gains compared to recognition of $5.2 million of losses during the nine months ended September 30, 2022.
Income Tax Expense (Benefit)
Income tax benefit for the nine months ended September 30, 2023 was $3.3 million, resulting in an effective tax rate of (18.7%). The effective tax rate for the current period differs from the federal statutory rate primarily due to an increase in the valuation allowance against domestic deferred tax assets and permanent differences, including nontaxable income related to a change in the fair value of warrants. Income tax benefit for the nine months ended September 30, 2022 was $3.5 million, resulting in an effective tax rate of 13.0%.
Critical Accounting Estimates
We make certain judgements and use certain estimates and assumptions when applying accounting principles in the preparation of our financial statements. The nature of those estimates and assumptions are material due to the levels of subjectivity and judgment necessary to account for highly uncertain factors or the susceptibility of such factors to change.
We believe the current assumptions and other considerations used to estimate amounts reflected in our financial statements are appropriate. However, if actual experience differs from the assumptions and other considerations used in estimating amounts reflected in our financial statements, the resulting changes could have a material adverse effect on our results of operations and, in certain situations, could have a material adverse effect on our financial condition.
For further information on our critical accounting estimates, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the notes to our audited financial statements included in our Annual Report on Form 10-K filed with the SEC on March 21, 2023. As of September 30, 2023, there have been no material changes to these estimates.
Liquidity and Capital Resources
Our principal liquidity needs are to fund operating expenses, meet debt service obligations, and fund investment activities, which include capital expenditures. Our primary sources of liquidity and capital resources are cash on hand, cash provided by operating activities, and available borrowings under our Revolving Credit Facility.
Our ability to generate cash provided by operating activities is dependent on several factors, including our ability to generate net sales and manage costs in-line with our expectations. Failure to meet our financial targets may restrict our liquidity and capital resources and our ability to maintain compliance with our financial covenants and may require us to
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modify, delay, or abandon some of our planned future expansion or development, or to otherwise enact operating cost reductions, which could have a material adverse effect on our business, operating results, financial condition, covenant compliance and ability to achieve our intended business objectives. Where possible, we seek to recover inflation-impacted costs by passing these costs onto our customers through periodic pricing increases. However, our pricing increases often lag our cost increases, including increases in commodity costs. The persistence of these negative effects on our business could adversely impact our ability to reach our revenue and other financial targets.
Credit Agreement
On August 29, 2022, we entered into a credit agreement (the “Credit Agreement”) among the Company, Westrock Beverage Solutions, LLC, as the borrower (the “Borrower”), Wells Fargo Bank, N.A., as administrative agent, collateral agent, and swingline lender, Wells Fargo Securities, LLC, as sustainability structuring agent, and each issuing bank and lender party thereto. The Credit Agreement includes (a) a senior secured first lien revolving credit facility in an initial aggregate principal amount of $175.0 million (the “Revolving Credit Facility”) and (b) a senior secured first lien term loan facility in an initial aggregate principal amount of $175.0 million (the “Term Loan Facility”). Proceeds from the Term Loan Facility were used for paying off existing indebtedness. The Revolving Credit Facility and the Term Loan Facility will mature on August 29, 2027. All obligations under the Credit Agreement are guaranteed by the Company and each of the Borrower’s domestic subsidiaries, which comprise our Beverage Solutions segment, and are secured by substantially all of the Company’s assets.
Borrowings under the Revolving Credit Facility and the Term Loan Facility will bear interest, at the Borrower’s option, initially at an annual rate equal to (i) Term SOFR plus a credit spread adjustment of 0.10% for loans with an interest period of one month, 0.15% for loans with an interest period of three months and 0.25% for loans with an interest period of six months, as applicable, (the “Adjusted Term SOFR”) or (ii) the base rate (determined by reference to the greatest of (i) the rate of interest last quoted by The Wall Street Journal in the U.S. as the prime rate in effect, (ii) the NYFRB Rate from time to time plus 0.50% and (iii) the Adjusted Term SOFR for a one month interest period plus 1.00%, (the “Base Rate”)), in each case plus the applicable margin. The Credit Agreement contains two financial covenants requiring the maintenance of a total net leverage ratio and an interest coverage ratio (the “Financial Covenants”). Commitment fees on the daily unused amount of commitments under the Revolving Credit Facility range from 0.20% to 0.35% depending on the total net leverage ratio. At September 30, 2023, we had $45.0 million of outstanding borrowings under the Revolving Credit Facility, with a weighted average interest rate of 9.0%, and the interest rate applicable to our Term Loan Facility was 9.2%, and we had $2.6 million of standby letters of credit outstanding.
On February 14, 2023, we entered into an Incremental Assumption Agreement and Amendment No. 1 to the Credit Agreement, which established a new class of incremental term loan commitments in the form of a senior secured delayed draw term loan credit facility (the “Delayed Draw Term Loan Facility”) in the aggregate principal amount of $50.0 million, proceeds of which may be used to fund capital expenditures related to our extract and ready-to-drink facility in Conway, Arkansas, or for general corporate purposes.
The interest rates under the Delayed Draw Term Loan Facility are the same as the interest rates with respect to the initial term loans under the existing Term Loan Facility, and the commitment fees applying to the unused portion of the Delayed Draw Term Loan Facility are the same as the commitment fees with respect to the Revolving Credit Facility. Any delayed draw term loan funded under the Delayed Draw Term Loan Facility will mature on August 29, 2027. As of the date of this Quarterly Report on Form 10-Q, no borrowings have been made under the Delayed Draw Term Loan Facility.
On June 30, 2023, we entered into Amendment No. 2 (the “Second Amendment”) to the Credit Agreement. The Second Amendment established a covenant relief period (the “Covenant Relief Period”) commencing on June 30, 2023, and ending on the earlier to occur of (i) April 1, 2025 and (ii) the date following December 31, 2023, on which the Borrower delivers to the administrative agent a certificate of a responsible officer (a) electing to terminate the Covenant Relief Period, (b) demonstrating a total net leverage ratio less than 3.75x and (c) attaching projections demonstrating compliance with the total net leverage ratio financial covenant (as in effect prior to giving effect to the Covenant Relief Period) until the then-existing latest maturity date.
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During the Covenant Relief Period, (i) the total net leverage ratio financial covenant will be (a) 5.00x for the test period ending June 30, 2023, (b) 5.25x for the test period ending September 30, 2023, (c) 5.50x for the test periods ending on or after December 31, 2023 to and including September 30, 2024, (d) 5.00x for the test period ending December 31, 2024 and (e) 4.50x for the test period ending March 31, 2025 and (ii) the applicable margin for any term SOFR rate loan will range from 2.50% to 3.75% and for any ABR loan will range from 1.50% to 2.75%, in each case depending on the total net leverage ratio. After the Covenant Relief Period, the total net leverage ratio financial covenant and the applicable margin for term SOFR rate loans and ABR loans will revert to the pre-amendment terms of the Credit Agreement. During and after the Covenant Relief Period, the minimum interest coverage ratio financial covenant will be 2.00x. As of September 30, 2023, we were in compliance with the Financial Covenants.
The Term Loan Facility requires quarterly principal payments during the first three years of approximately $2.2 million (1.25% of the original principal balance). Quarterly payments increase to approximately $3.3 million and $4.4 million (1.875% and 2.5% of the original principal balance) during the fourth and fifth years, respectively.
International Debt and Lending Facilities
On March 21, 2023, we entered into a $70 million working capital trade finance facility with multiple financial institutions through our subsidiary, Falcon Coffees Limited (“Falcon”). The facility replaced Falcon’s then existing working capital trade finance facility. The facility is uncommitted and repayable on demand, with certain of Falcon’s assets pledged as collateral against the facility. The facility will mature one year from inception. Borrowings under the facility will bear interest at the borrower’s option at a rate equal to (a) Term SOFR plus a margin of 4.00% plus a liquidity premium set by the lender at the time of borrowing or (b) the Base Rate (determined by reference to the greatest of (i) the Prime Rate at such time, (ii) one-half of 1.00% in excess of the Federal Funds Effective Rate at such time, and (iii) Term SOFR for a one-month tenor in effect at such time plus 1.00%). At September 30, 2023, there was $42.5 million of outstanding borrowings under the facility, which is recorded in short-term debt in the Condensed Consolidated Balance Sheets. Falcon’s facility contains certain restrictive financial covenants which require Falcon to maintain certain levels of working capital, debt, and net worth. Falcon was in compliance with these financial covenants as of September 30, 2023.
On September 28, 2023, we entered into a $5.0 million unsecured working capital trade finance facility with responsAbility Climate Smart Agriculture & Food Systems Fund through our subsidiary, Falcon. The facility will mature on December 31, 2026, and requires stepped repayments of $0.5 million on December 31, 2024, $1.0 million on December 31, 2025 and $3.5 million on December 31, 2026. Borrowings under the facility will bear interest at the borrower’s option at a rate equal to (a) (i) the most recent applicable Term SOFR for the longest period (for which Term SOFR is available) which is less than the applicable interest period of the loan or (ii) If no such Term SOFR is available for a period which is less than the applicable interest period, SOFR for the day which is two U.S. Government Securities Business Days before the Quotation day; or (b) the most recent applicable Term SOFR (as of Quotation Day) for the shortest period (for which Term SOFR is available) which exceeds the applicable interest period of that loan, in each case plus the applicable margin. At September 30, 2023, there was $5.0 million of outstanding borrowings under the facility, which is recorded in long-term debt, net on the Condensed Consolidated Balance Sheets. Falcon’s facility contains certain restrictive financial covenants which require Falcon to maintain certain levels of working capital, debt, and tangible net worth. Falcon was in compliance with these financial covenants as of September 30, 2023.
Westrock Coffee International, LLC, through its subsidiary Rwanda Trading Company, maintains two mortgage and inventory-backed lending facilities with a local bank in Rwanda: (a) a short-term trade finance facility with a balance of $8.5 million at September 30, 2023 and (b) a long-term note payable with a balance of $1.4 million at September 30, 2023. Additionally, Rwanda Trading Company maintains three short-term futures contract-backed lending facilities from international institutions with outstanding balances of $0.8 million, $0.7 million and $0.6 million at September 30, 2023.
Current and Long-Term Liquidity
Our liquidity needs are to fund operating expenses, meet debt service obligations, and fund both current and long-term investment activities, which include capital expenditures. We expect to use proceeds from the equity issuance in August
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2023, cash from operations and borrowings available under the Credit Agreement, as amended, to fund our near-term growth strategies, which include, (i) extending and enhancing product offerings through innovation, (ii) expanding our customer base, (iii) expanding geographically, (iv) funding accretive acquisitions, and (v) continuing to drive margin expansion.
A key component of our long-term growth strategy will be to complete the build-out of our extract and ready-to-drink manufacturing facility in Conway, Arkansas, which will utilize state-of-the-art equipment specifically designed to efficiently manufacture and package a wide range of beverages, such as canned or bottled cold brew coffees, lattes, assorted teas, and juice-based products.
We believe proceeds from the HF Investment, PIPE Investments and BBH Preemptive Rights, cash from operations and available borrowings under our Revolving Credit Facility and Delayed Draw Down Term Loan Facility will provide sufficient cash on-hand to complete the build-out. However, the Company will continuously evaluate its liquidity needs, and may seek to opportunistically access additional liquidity, including through either the debt or equity capital markets. If it is determined that we have insufficient liquidity to fund the Conway facility build-out or fund our acquisition strategy, we may delay the build-out of the Conway facility and/or modify the scope of the build-out and we may reprioritize our strategy to focus on organic growth opportunities, which may have an adverse impact on our ability to achieve our growth objectives.
Warrant Proceeds
As of September 30, 2023, we had 19,144,120 outstanding warrants to purchase 19,144,120 Common Shares, exercisable at an exercise price of $11.50 per share, which expire on the earliest to occur of August 26, 2027 (i.e. the five year anniversary of the Closing), redemption or liquidation. The exercise of warrants, and any proceeds we may receive from their exercise, are highly dependent on the price of our Common Shares and the spread between the exercise price of the warrant and the price of our Common Shares at the time of exercise. For example, to the extent that the price of our Common Shares exceeds $11.50 per share, it is more likely that holders of our warrants will exercise their warrants. If the price of our Common Shares is less than $11.50 per share, it is unlikely that such holders will exercise their warrants. Even if our warrants are in the money, there can be no assurance that warrant holders will exercise their warrants prior to their expiration. Our Westrock Public Warrants under certain conditions, as described in their warrant agreement, are redeemable by the Company at a price of $0.01 per warrant or on a cashless basis. Our Westrock Private Placement Warrants are not redeemable so long as they are held by the Riverview Sponsor or its permitted transferees. As such, it is possible that we may never generate any or only very limited cash proceeds from the exercise of our warrants.
As of the date of this Quarterly Report on Form 10-Q, we have neither included nor intend to include any potential cash proceeds from the exercise of our warrants in our short-term or long-term liquidity sources or capital resource planning. We do not expect to rely on the cash exercise of warrants to fund our operations. Instead, we intend to rely on our primary sources of cash discussed above to continue to support our operations. Therefore, the availability or unavailability of any proceeds from the exercise of our warrants is not expected to affect our ability to fund our operations. We will continue to evaluate the probability of warrant exercise over the life of our warrants and the merit of including potential cash proceeds from the exercise thereof in our liquidity sources and capital resources planning.
To the extent such warrants are exercised, additional Common Shares will be issued, which will result in dilution to the holders of our Common Shares and increase the number of Common Shares eligible for resale in the public market. Sales of substantial numbers of such shares in the public market could adversely affect the market price of our Common Shares, which increases the likelihood of periods when our warrants will not be in the money prior to their expiration.
Redemptions of Series A Preferred Shares
After February 26, 2028 (i.e. the five-and-half year anniversary of the Closing), any holder of Series A Preferred Shares may require Westrock to redeem all or any whole number of such holder’s Series A Preferred Shares in cash, subject to applicable law and the terms of any credit agreement or similar arrangement pursuant to which a third-party lender provides debt financing to Westrock or its subsidiaries, at a redemption price per share equal to the greater of (a) the
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liquidation preference and (b) the product of (i) the number of Common Shares that would have been obtained from converting one Series A Preferred Share on the redemption notice date and (ii) the simple average of the daily volume-weighted average price per Common Share for the ten (10) trading days ending on and including the trading day immediately preceding the redemption notice date. Assuming that the liquidation preference of the Series A Preferred Shares remains $11.50 per share and all 23,511,922 Series A Preferred Shares remain outstanding after February 26, 2028, we estimate an aggregate redemption payment of at least approximately $270.0 million. If Westrock was required by the holders to redeem a significant number of Series A Preferred Shares, Westrock may not have enough cash available (including through draws on its credit facility) for other purposes such as paying dividends on the Common Shares, repurchases of Common Shares, financing acquisitions or other expansions, paying employee incentives and executing its business strategy. An outflow of a significant amount of cash from Westrock as a result of redemptions of the Series A Preferred Shares may cause a deterioration in the financial condition of Westrock and our ability to pay our other obligations and/or execute our business strategy. The impact of such redemptions on Westrock will depend, among other things, on the financial condition of Westrock at the time of such redemptions, including the amount of available cash on hand and ability to draw on Westrock’s credit facilities or obtain other sources of financing, the business strategies and objectives of Westrock at that time and the magnitude of such redemptions. Additionally, we may reserve cash, refrain from pursuing other business objectives and/or direct cash away from other business objectives to ensure that we have sufficient available cash to satisfy holder redemptions and this may adversely affect our business and financial condition and ability to execute on our business strategy.
Contractual and Other Obligations
Our material contractual and other obligations include the payment of principal and interest under our debt obligations and future purchase of inventory obligations. Our Term Loan Facility requires quarterly principal payments during the first three years of approximately $2.2 million (1.25% of the original principal balance). Quarterly payments increase to approximately $3.3 million and $4.4 million (1.875% and 2.5% of the original principal balance) during the fourth and fifth years, respectively. We have no other material obligations to pay principal amounts of our long-term debt obligations prior to their maturity.
Future purchase obligations of $234.0 million as of September 30, 2023 consist of commitments for the purchase of inventory over the next 12 months. These obligations represent the minimum contractual obligations expected under the normal course of business. There are no material purchase obligations beyond 12 months.
We have future obligations to repurchase $6.0 million of inventory associated with repurchase agreements in which the Company’s SS&T segment has sold inventory to a third party and from whom the Company’s Beverage Solution segment has an obligation to repurchase.
Capital Expenditures
We categorize our capital expenditures as (i) growth, (ii) maintenance, (iii) customer beverage equipment or (iv) other.
We define growth capital expenditures as investments in our manufacturing facilities that will contribute to revenue growth by increasing production capacity, improving production efficiencies, or related to production of new products. Maintenance capital expenditures are those necessary to keep our existing manufacturing equipment fully operational. Customer beverage equipment represents Company-owned equipment that is deployed in our customers’ locations.
Capital expenditures for the nine months ended September 30, 2023 and 2022 were as follows:
Customer
Beverage
(Thousands)
Growth
Maintenance
Equipment
Other
Total
Nine months ended September 30, 2023
$
113,594
$
2,531
$
1,533
$
3,887
$
121,545
Nine months ended September 30, 2022
$
15,779
$
2,099
$
3,544
$
1,544
$
22,966
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We expect to continue to invest to expand our extract and ready-to-drink product manufacturing capacity in Conway, Arkansas.
If circumstances warrant, we may need to take measures to conserve cash, which may include a suspension, delay, or reduction in growth and/or maintenance capital expenditures. We continually assess our capital expenditure plans in light of developments impacting our business, including the needs of our customers.
Off-Balance Sheet Arrangements
As of the date of this Quarterly Report on Form 10-Q, we do not have any off-balance sheet arrangements.
Recent Accounting Pronouncements
See Note 3, Summary of Significant Accounting Policies, to the Condensed Consolidated Financial Statements included in Item I of Part 1 of this Quarterly Report on Form 10-Q for a detailed discussion of recent accounting pronouncements.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in the market risks discussed in Item 7A “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K filed with the SEC on March 21, 2023.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.