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 and nine months ended September 30, 2024. 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, 2023 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 15, 2024.
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 Consolidated Adjusted EBITDA to evaluate our performance, identify trends, formulate financial projections, and to make strategic decisions.
Consolidated Adjusted EBITDA
We refer to EBITDA and Consolidated 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 Consolidated 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. The Company believes that providing these non-GAAP
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financial measures 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, provision for income taxes and depreciation and amortization. We define “Consolidated Adjusted EBITDA” as EBITDA before equity-based compensation expense and the impact, which may be recurring in nature, of transaction, 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 non-capitalizable costs necessary to place the Conway extract and ready-to-drink facility into commercial production, 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 Consolidated Adjusted EBITDA are important supplemental measures to net (loss) income because they provide additional information to evaluate our operating performance on an unleveraged basis.
Since EBITDA and Consolidated 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 Consolidated Adjusted EBITDA may not be comparable to that reported by other companies that define EBITDA and Consolidated Adjusted EBITDA differently than we do.
The reconciliation of our net (loss) income to EBITDA and Consolidated Adjusted EBITDA for the three and nine months ended September 30, 2024 and 2023 is as follows:
Three Months Ended September 30,
Nine Months Ended September 30,
(Thousands)
2024
2023
2024
2023
Net (loss) income
$
(14,259)
$
16,621
$
(55,691)
$
(14,516)
Interest expense
6,889
7,803
21,921
21,216
Income tax expense (benefit)
84
(5,212)
1,254
(3,331)
Depreciation and amortization
7,680
6,364
23,196
18,419
EBITDA
394
25,576
(9,320)
21,788
Transaction, restructuring and integration expense
2,538
3,137
9,901
12,682
Change in fair value of warrant liabilities
(5,481)
(25,105)
(7,134)
(18,833)
Management and consulting fees (S&D Coffee, Inc. acquisition)
—
—
—
556
Equity-based compensation
3,028
2,439
8,508
6,297
Impairment charges
1,165
—
1,996
—
Conway extract and ready-to-drink facility pre-production costs
7,937
3,035
30,115
6,615
Mark-to-market adjustments
470
1,160
(2,692)
(1,045)
Loss on disposal of property, plant and equipment
(8)
248
965
1,145
Other
226
1,105
1,506
2,153
Consolidated Adjusted EBITDA
$
10,269
$
11,595
$
33,845
$
31,358
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The Company presents Consolidated Adjusted EBITDA as excluding certain Conway extract and ready-to-drink facility start-up costs (“Conway Start-up Costs”). Prior to the third quarter of 2024, Conway Start-up Costs included two categories: (i) non-capitalizable costs necessary to place production and packaging capabilities into commercial production (“pre-production costs”), and (ii) recurring operating costs incurred once a capability is placed into commercial production but before completion of the production scale up (“scale up operating costs”). Beginning in the third quarter of 2024, the Company no longer excludes scale up operating costs in the determination of Consolidated Adjusted EBITDA. Consolidated Adjusted EBITDA for the three and six months ended June 30, 2024 has been revised to exclude the impact of scale up operating costs, as follows:
Three Months Ended
Six Months Ended
(Thousands)
June 30, 2024
June 30, 2024
Consolidated Adjusted EBITDA, as presented
$
13,664
$
24,806
Conway extract and ready-to-drink facility scale-up costs
(1,230)
(1,230)
Consolidated Adjusted EBITDA, as revised
$
12,434
$
23,576
Significant Developments
Warrant Exchange
On August 28, 2024, the Company announced that it had commenced an exchange offer (the “Offer”) and consent solicitation (the “Consent Solicitation”) relating to its outstanding (i) public warrants to purchase shares of common stock of the Company, par value $0.01 per share (the “Common Shares”), which warrants trade on The Nasdaq Global Market (the “Nasdaq”) under the symbol “WESTW” (the “Westrock Public Warrants”), and (ii) private placement warrants to purchase common shares (the “Westrock Private Warrants” and, together with the Westrock Public Warrants, the “Westrock Warrants”). The Company offered to all holders of the Westrock Warrants the opportunity to receive 0.290 common shares in exchange for each of the Westrock Warrants tendered pursuant to the Offer. Concurrently with the Offer, the Company also solicited consents from the holders of each of the Westrock Public Warrants and the Westrock Private Warrants to amend that certain Warrant Agreement, dated as of August 25, 2022, by and between the Company and Computershare Inc., a Delaware corporation, and its affiliate, Computershare Trust Company, N.A., a federally chartered trust company, as warrant agent (the “Warrant Agent”), which governs all of the Warrants (the “Warrant Agreement”), to permit the Company to require that (x) each Westrock Public Warrant that is outstanding upon the closing of the Offer be exchanged for 0.261 common shares, which is a ratio 10% less than the exchange ratio applicable to the Offer and (y) each Westrock Private Warrant that is outstanding upon the closing of the Offer be exchanged for 0.261 common shares, which is a ratio 10% less than the exchange ratio applicable to the Offer (such amendment, the “Warrant Amendment”).
The Offer and Consent Solicitation expired on September 26, 2024 (the “Expiration Date”). As of the Expiration Date, (x) 16,676,541 outstanding Westrock Public Warrants were validly tendered and not validly withdrawn in the Offer and Consent Solicitation, representing approximately 97.42% of the Westrock Public Warrants and (y) 2,026,046 outstanding Westrock Private Warrants were validly tendered and not validly withdrawn in the Offer and Consent Solicitation, representing 100% of the Westrock Private Warrants. On September 30, 2024, the Company issued 5,423,681 Common Shares in exchange for the tendered Westrock Warrants.
In addition, pursuant to the Consent Solicitation, the Company received the approval of holders of approximately 97.42% of the outstanding Westrock Public Warrants and 100% of the outstanding Westrock Private Warrants to adopt the Warrant Amendment, which exceeded (x) the 50% threshold of the outstanding Westrock Public Warrants required to amend the Warrant Agreement with respect to the Westrock Public Warrants and (y) the 50% threshold of the outstanding Westrock Private Warrants required to amend the Warrant Agreement with respect to the Westrock Private Warrants. Accordingly, the Company and the Warrant Agent entered into the Warrant Amendment, dated September 30, 2024. On September 30, 2024, the Company announced that it would exercise its right, in accordance with the terms of the Warrant Amendment, to exchange each Westrock Public Warrant that is outstanding following the closing of the Offer for 0.261 common shares per warrant (the “Post-Offer Exchange”). In lieu of issuing fractional shares, any holder of warrants who would otherwise have been entitled to receive fractional shares, after aggregating all such fractional shares of such holder, was paid in cash (without interest) in an amount equal to such fractional part of a share multiplied
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by $6.74. The Company fixed the date for the Post-Offer Exchange as October 15, 2024. On October 16, 2024, the Company issued 115,220 Common Shares for the untendered Westrock Public Warrants. Following the completion of the Offer and Post-Offer Exchange, no Westrock Warrants remain outstanding. Accordingly, the Westrock Public Warrants were suspended from trading on the Nasdaq as of the close of business on October 15, 2024, and were delisted.
Falcon Credit Agreement Amendment
On August 21, 2024, Falcon Coffees Limited, a wholly owned subsidiary of the Company, amended its working capital trade finance facility. The amendment increased the facility size from $55.0 million to $75.0 million. The interest rates and maturity date were unchanged as a result of the amendment. See Note 11 to our Condensed Consolidated Financial Statements for additional discussion related to the working capital trade finance facility.
Results of Operations
Comparison of the Three Months Ended September 30, 2024 and 2023
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
(Dollars in Thousands)
September 30, 2024
Revenues
September 30, 2023
Revenues
Net sales
$
220,860
100.0
%
$
219,612
100.0
%
Costs of sales
183,775
83.2
%
184,546
84.0
%
Gross profit
37,085
16.8
%
35,066
16.0
%
Selling, general and administrative expense
46,132
20.9
%
37,050
16.9
%
Transaction, restructuring and integration expense
2,538
1.1
%
3,137
1.4
%
Impairment charges
1,165
0.5
%
—
0.0
%
Loss on disposal of property, plant and equipment
(8)
(0.0)
%
248
0.1
%
Total operating expenses
49,827
22.6
%
40,435
18.4
%
Loss from operations
(12,742)
(5.8)
%
(5,369)
(2.4)
%
Other (income) expense
Interest expense
6,889
3.1
%
7,803
3.6
%
Change in fair value of warrant liabilities
(5,481)
(2.5)
%
(25,105)
(11.4)
%
Other, net
(10)
(0.0)
%
510
0.2
%
(Loss) income before income taxes and equity in earnings from unconsolidated entities
(14,140)
(6.4)
%
11,423
5.2
%
Income tax expense (benefit)
84
0.0
%
(5,212)
(2.4)
%
Equity in (earnings) loss from unconsolidated entities
35
0.0
%
14
0.0
%
Net (loss) income
$
(14,259)
(6.5)
%
$
16,621
7.6
%
Net (loss) income attributable to shareholders
(14,259)
(6.5)
%
16,621
7.6
%
Participating securities' share in earnings
—
0.0
%
(3,912)
(1.8)
%
Accretion of Series A Convertible Preferred Shares
88
0.0
%
93
0.0
%
Net (loss) income attributable to common shareholders
$
(14,171)
(6.4)
%
$
12,802
5.8
%
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Net Sales
Three Months Ended September 30,
(Thousands)
2024
2023
Beverage Solutions
$
164,010
$
176,818
Sustainable Sourcing & Traceability 1
56,850
42,794
Total net sales
$
220,860
$
219,612
(1) Net of intersegment revenues.
Net Sales from our Beverage Solutions segment were $164.0 million for the three months ended September 30, 2024, compared to $176.8 million for the three months ended September 30, 2023, a decrease of approximately 7.2%. The decrease was primarily due to a $16.4 million decrease in the sale of coffee and tea products, driven by a 6.4% decrease in roast and ground coffee volumes and a 24.4% decrease in single serve cup volumes, partially offset by a $3.1 million increase in the sale of flavors, extracts and ingredients products, driven by an 18.5% increase in flavors, extracts and ingredients volumes.
Net Sales from our SS&T segment, net of intersegment revenues, totaled $56.9 million for the three months ended September 30, 2024, increasing 32.8% compared to $42.8 million for the three months ended September 30, 2023. The increase is driven by an increase in sales volume, which increased 35.9% compared to the three months ended September 30, 2023.
Costs of Sales
Three Months Ended September 30,
(Thousands)
2024
2023
Beverage Solutions
$
131,762
$
144,920
Sustainable Sourcing & Traceability
52,013
39,626
Total costs of sales
$
183,775
$
184,546
In our Beverage Solutions segment, costs of sales decreased to $131.8 million for the three months ended September 30, 2024, from $144.9 million for the three months ended September 30, 2023. The decrease in costs of sales was primarily driven by a decrease in the sale of coffee and tea products and single serve cup volumes for the three months ended September 30, 2024 compared to the three months ended September 30, 2023.
In our SS&T segment, costs of sales increased $12.4 million to $52.0 million for the three months ended September 30, 2024 compared to the three months ended September 30, 2023. This increase is primarily due to an increase in green coffee sales volume. Costs of sales in our SS&T segment for the three months ended September 30, 2024 included $0.5 million of net unrealized losses on forward sales and purchase contracts and mark-to-market adjustments on green coffee inventory compared to $1.2 million of net unrealized losses for the three months ended September 30, 2023.
Selling, General and Administrative Expense
Three Months Ended September 30,
2024
2023
% of Segment
% of Segment
(Dollars in Thousands)
Amount
Revenues
Amount
Revenues
Beverage Solutions
$
43,126
26.3
%
$
34,577
19.6
%
Sustainable Sourcing & Traceability
3,006
5.3
%
2,473
5.8
%
Total selling, general and administrative expense
$
46,132
20.9
%
$
37,050
16.9
%
Total selling, general and administrative expenses in our Beverage Solutions segment increased $8.5 million to $43.1 million for the three months ended September 30, 2024, compared to the three months ended September 30, 2023. The
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increase is primarily due to an $8.9 million increase in expenses associated with the start-up of our extract and ready-to-drink facility in Conway, Arkansas. In our SS&T segment, selling, general and administrative costs were relatively unchanged compared to the three months ended September 30, 2023.
Transaction, Restructuring and Integration Expense
Transaction, restructuring and integration expenses for the three months ended September 30, 2024 were $2.5 million, approximately $1.4 million of which related to professional and legal costs associated with the Westrock Warrant exchange and $1.0 million of which related to plant closure costs. During the three months ended September 30, 2023, we incurred $3.1 million of transaction, restructuring and integration expenses, 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 system costs and $1.0 million of which primarily related to non-capitalizable costs associated with registration statements.
Interest Expense
Three Months Ended September 30,
(Thousands)
2024
2023
Interest expense
Cash:
Term loan and delayed draw term loan facilities
$
4,782
$
4,276
Revolving credit facility
2,036
684
Convertible notes payable
281
—
Convertible notes payable - related party
639
—
Supply chain finance program
326
969
International trade finance lines
1,596
1,195
International notes payable
213
33
Other
269
1,110
Total cash interest
10,142
8,267
Non-cash:
Amortization of deferred financing costs
717
571
Capitalized interest
(3,970)
(1,035)
Total non-cash interest
(3,253)
(464)
Total interest expense
$
6,889
$
7,803
Interest expense for the three months ended September 30, 2024 was $6.9 million compared to $7.8 million for the three months ended September 30, 2023. Interest expense associated with our revolving credit facility increased $1.4 million, primarily due to higher outstanding borrowings, and interest on our Convertible Notes increased $0.9 million. During the three months ended September 30, 2024, the Company capitalized approximately $4.0 million of interest costs associated with the build-out of our extract and ready-to-drink facility in Conway, Arkansas, compared to $1.0 million of such interest for the three months ended September 30, 2023.
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, 2024 resulted in recognition of $5.5 million of gains compared to recognition of $25.1 million of gains during the three months ended September 30, 2023.
Income Tax Expense (Benefit)
Income tax expense for the three months ended September 30, 2024 was $0.1 million, resulting in an effective tax rate of (0.6%). The effective tax rate for the current period differs from the federal statutory rate primarily due to an increase in
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the valuation allowance against domestic deferred tax assets. Income tax benefit for the three months ended September 30, 2023 was $5.2 million, resulting in an effective tax rate of (45.7%).
Comparison of the Nine Months Ended September 30, 2024 and 2023
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
(Dollars in Thousands)
September 30, 2024
Revenues
September 30, 2023
Revenues
Net Sales
$
621,749
100.0
%
$
649,748
100.0
%
Costs of sales
505,987
81.4
%
544,707
83.8
%
Gross profit
115,762
18.6
%
105,041
16.2
%
Selling, general and administrative expense
142,182
22.9
%
105,275
16.2
%
Transaction, restructuring and integration expense
9,901
1.6
%
12,682
2.0
%
Impairment charges
1,996
0.3
%
—
0.0
%
Loss on disposal of property, plant and equipment
965
0.2
%
1,145
0.2
%
Total operating expenses
155,044
24.9
%
119,102
18.3
%
Loss from operations
(39,282)
(6.3)
%
(14,061)
(2.2)
%
Other (income) expense
Interest expense
21,921
3.5
%
21,216
3.3
%
Change in fair value of warrant liabilities
(7,134)
(1.1)
%
(18,833)
(2.9)
%
Other, net
223
0.0
%
1,323
0.2
%
Loss before income taxes and equity in earnings from unconsolidated entities
(54,292)
(8.7)
%
(17,767)
(2.7)
%
Income tax expense (benefit)
1,254
0.2
%
(3,331)
(0.5)
%
Equity in (earnings) loss from unconsolidated entities
145
0.0
%
80
0.0
%
Net loss
$
(55,691)
(9.0)
%
$
(14,516)
(2.2)
%
Net income (loss) attributable to non-controlling interest
—
0.0
%
15
0.0
%
Net loss attributable to shareholders
(55,691)
(9.0)
%
(14,531)
(2.2)
%
Accretion of Series A Convertible Preferred Shares
262
0.0
%
(249)
(0.0)
%
Net loss attributable to common shareholders
$
(55,429)
(8.9)
%
$
(14,780)
(2.3)
%
Net Sales
Nine Months Ended September 30,
(Thousands)
2024
2023
Beverage Solutions
$
485,322
$
547,746
Sustainable Sourcing & Traceability 1
136,427
102,002
Total net sales
$
621,749
$
649,748
(1) Net of intersegment revenues.
Net Sales from our Beverage Solutions segment were $485.3 million for the nine months ended September 30, 2024, compared to $547.7 million for the nine months ended September 30, 2023, a decrease of approximately 11.4%. The decrease was primarily due to a $75.9 million decrease in the sale of coffee and tea products, driven by a 17.8% decrease in roast and ground coffee volumes and a 15.0% decrease in single serve cup volumes, partially offset by an $11.2
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million increase in the sale of flavors, extracts and ingredients products, driven by a 28.9% increase in flavors, extracts and ingredients volumes.
Net Sales from our SS&T segment, net of intersegment revenues, totaled $136.4 million for the nine months ended September 30, 2024, increasing 33.7% compared to $102.0 million for the nine months ended September 30, 2023. The increase is driven by an increase in sales volume, which increased 43.9%, partially offset by a 7.7% decrease in average sales price per pound for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023. The decrease in the average sales price per pound is directly correlated to the global commodities price.
Costs of Sales
Nine Months Ended September 30,
(Thousands)
2024
2023
Beverage Solutions
$
383,460
$
452,878
Sustainable Sourcing & Traceability
122,527
91,829
Total costs of sales
$
505,987
$
544,707
In our Beverage Solutions segment, costs of sales decreased to $383.5 million for the nine months ended September 30, 2024, from $452.9 million for the nine months ended September 30, 2023. The decrease in costs of sales was primarily driven by a decrease in the sale of coffee and tea products and single serve cup volumes for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023.
In our SS&T segment, costs of sales increased $30.7 million to $122.5 million for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023. This increase is primarily due to an increase in green coffee sales volume. Costs of sales in our SS&T segment for the nine months ended September 30, 2024 included $2.7 million of net unrealized gains on forward sales and purchase contracts and mark-to-market adjustments on green coffee inventory compared to $1.0 million of net unrealized gains for the nine months ended September 30, 2023.
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Selling, General and Administrative Expense
Nine Months Ended September 30,
2024
2023
% of Segment
% of Segment
(Dollars in Thousands)
Amount
Revenues
Amount
Revenues
Beverage Solutions
$
133,920
27.6
%
$
97,798
17.9
%
Sustainable Sourcing & Traceability
8,262
6.1
%
7,477
7.3
%
Total selling, general and administrative expense
$
142,182
22.9
%
$
105,275
16.2
%
Total selling, general and administrative expenses in our Beverage Solutions segment increased $36.1 million to $133.9 million for the nine months ended September 30, 2024, compared to the nine months ended September 30, 2023. The increase is primarily due to a $28.7 million increase in expenses associated with the start-up of our extract and ready-to-drink facility in Conway, Arkansas. In our SS&T segment, selling, general and administrative costs were relatively unchanged compared to the nine months ended September 30, 2023.
Transaction, Restructuring and Integration Expense
Transaction, restructuring and integration expenses for the nine months ended September 30, 2024 were $9.9 million, approximately $3.5 million of which related to severance and other employee termination and benefit costs associated with the elimination of various positions as part of cost reduction objectives, $2.4 million of which related to the establishment of our at-the-market common stock offering program and $1.4 million of which related to professional and legal costs associated with the Westrock Warrant exchange. During the nine months ended September 30, 2023, we incurred $12.7 million of transaction, restructuring and integration expenses, 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 system costs and $2.0 million of non-capitalizable costs associated with acquisitions and registration statements.
Interest Expense
Nine Months Ended September 30,
(Thousands)
2024
2023
Interest expense
Cash:
Term loan and delayed draw term loan facilities
$
14,312
$
10,180
Revolving credit facility
3,863
2,841
Convertible notes payable
697
—
Convertible notes payable - related party
1,583
—
Supply chain finance program
4,870
1,189
International trade finance lines
3,604
3,391
International notes payable
611
87
Other
1,082
3,003
Total cash interest
30,622
20,691
Non-cash:
Amortization of deferred financing costs
2,432
1,560
Capitalized interest
(11,133)
(1,035)
Total non-cash interest
(8,701)
525
Total interest expense
$
21,921
$
21,216
Interest expense for the nine months ended September 30, 2024 was $21.9 million compared to $21.2 million for the nine months ended September 30, 2023. $4.1 million of the increase is attributable to interest expense associated with our term loan and delayed draw term loan facilities, primarily due to higher outstanding borrowings, and $2.3 million of the increase is due to interest on our Convertible Notes. In addition, we incurred $4.9 million in interest on our supply chain finance program borrowings for the nine months ended September 30, 2024, compared to $1.2 million of such
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interest for the nine months ended September 30, 2023. Furthermore, during the nine months ended September 30, 2024, the Company capitalized approximately $11.1 million of interest costs associated with the build-out of our extract and ready-to-drink facility in Conway, Arkansas, compared to $1.0 million of such interest for the nine months ended September 30, 2023.
Change in Fair Value of Warrant Liabilities
The change in fair value of warrant liabilities for the nine months ended September 30, 2024 resulted in recognition of $7.1 million of gains compared to recognition of $18.8 million of gains during the nine months ended September 30, 2023.
Income Tax Expense (Benefit)
Income tax expense for the nine months ended September 30, 2024 was $1.3 million, resulting in an effective tax rate of (2.3%). 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. Income tax benefit for the nine months ended September 30, 2023 was $3.3 million, resulting in an effective tax rate of 18.7%.
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 15, 2024. As of September 30, 2024, 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 Credit Agreement (as defined herein).
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, including any adverse impact from changes or further delays in the estimated timing and volume of products to be commercialized in our extract and ready-to-drink manufacturing facility in Conway, Arkansas, may restrict our liquidity and capital resources and our ability to maintain compliance with our financial covenants and may require us to 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.
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Credit Agreement
The Company is party to 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”), (b) a senior secured first lien term loan facility in an initial aggregate principal amount of $175.0 million (the “Term Loan Facility”), and (c) 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. The Revolving Credit Facility, the Term Loan Facility and the Delayed Draw 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, the Term Loan Facility and the Delayed Draw Term Loan Facility will bear interest, at the Borrower’s option, initially at an annual rate equal to (a) 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 (b) the base rate (determined by reference to the greatest of (i) the rate of interest last quoted by The Wall Street Journal in the United States 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 an applicable margin.
At September 30, 2024, we had $107.5 million of outstanding borrowings under the Revolving Credit Facility, with a weighted average interest rate of 8.8% and we had $2.6 million of standby letters of credit outstanding. At September 30, 2024 the interest rate applicable to our Term Loan Facility was 8.0% and the interest rate applicable to our Delayed Draw Term Loan Facility was 8.9%.
On February 15, 2024, the Borrower entered into Amendment No. 3 (the “Third Amendment”) to the Credit Agreement. The Third Amendment modified the existing covenant relief period (the “Covenant Relief Period”), which commenced on June 30, 2023 and will end on the earlier to occur of (i) April 1, 2026 and (ii) any date following June 30, 2024, on which the Borrower elects to terminate the Covenant Relief Period subject to satisfaction of certain conditions. During the Covenant Relief Period, the Company’s ability to incur additional indebtedness and make investments, restricted payments and junior debt restricted payments will be more limited. The Third Amendment permits the Company to issue convertible notes, including the Convertible Notes (as defined herein).
During the Covenant Relief Period, the applicable margin for any term SOFR rate loan will range from 3.00% to 4.00% and for any ABR loan will range from 2.00% to 3.00%, in each case depending on the secured net leverage ratio. After the Covenant Relief Period, the applicable margin for any term SOFR rate loan will range from 2.00% to 3.00% and for any ABR loan will range from 1.00% to 2.00%, in each case depending on the secured net leverage ratio.
The Credit Agreement, as amended, requires the Borrower to maintain compliance with (i) a secured net leverage ratio at levels ranging from 4.50:1.00 to 6.25:1.00 and stepping down to 4.50:1.00 by April 2026 and (ii) an interest coverage ratio of at least 1.50:1.00 on and prior to September 30, 2025 and at least 2.00:1.00 on December 31, 2025 and thereafter. The Credit Agreement, as amended, also includes (i) a minimum liquidity covenant requiring the Borrower not to permit its liquidity, measured as of the last business day of each calendar month commencing March 29, 2024, to be less than $15 million and (ii) an anti-cash hoarding covenant, which shall be effective only during the Covenant Relief Period, requiring the Borrower to have no more than $20 million of unrestricted cash on the last day of each calendar month when revolving loans or letters of credit are outstanding or on the date of borrowing of a revolving loan. Failure to comply with these covenants or make payments when due could result in an event of default, which, if not cured or waived, could accelerate our repayment obligations under the Credit Agreement and could result in a default and acceleration under other agreements containing cross-default provisions. Under these circumstances, we might not have sufficient funds or other resources to satisfy all of our obligations. As of the date of this Quarterly Report on Form 10-Q, the Company was in compliance with its financial covenants.
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The Term Loan Facility and Delayed Draw Term Loan Facility require quarterly principal payments totaling approximately $2.8 million (1.25% of the original principal balance). Quarterly payments increase to approximately $4.2 million and $5.6 million (1.875% and 2.5% of the original principal balance) during the final two years of the agreements, respectively.
We incurred a total of $2.4 million in financing fees in connection with the Third Amendment. Approximately $1.3 million of the fees were allocated to the Term Loan Facility and are being amortized over the remaining term of the Term Loan Facility utilizing the frozen effective yield method based on the interest rate in place at the issuance of the Term Loan Facility. Approximately $1.0 million of the fees were allocated to the Revolving Credit Facility, are reported within other long-term assets on the Condensed Consolidated Balance Sheets and are being amortized ratably over the remaining term of the Revolving Credit Facility.
Convertible Notes
On February 15, 2024, the Company sold and issued in a private placement $72.0 million in aggregate principal amount of 5.00% convertible senior notes due 2029 (the “Convertible Notes”), of which $50.0 million was from related parties. The Convertible Notes are unsecured, senior obligations of the Company and accrue interest at a rate of 5.00% per annum.
The Convertible Notes are carried at amortized cost and are recorded in long-term debt, net and convertible notes payable – related party, net on the Condensed Consolidated Balance Sheets. At September 30, 2024, the carrying value of the Convertible Notes was $71.6 million, of which $49.7 million was from related parties. We incurred a total of $0.5 million of financing fees in connection with the Convertible Notes, which were ratably allocated to the convertible notes payable and the convertible notes payable – related party, respectively, and are being amortized into interest expense over the remaining term of the Convertible Notes utilizing the effective interest rate method.
Pursuant to the terms of the Convertible Notes, noteholders may convert their Convertible Notes at their option only in the following circumstances: (i) during the period commencing on August 15, 2024, and prior to the close of business on the trading day immediately preceding August 15, 2028, if the closing price for at least 20 trading days (whether or not consecutive) during the period of any 30 consecutive trading days in the immediately preceding calendar quarter is equal to or greater than 130% of the conversion price; (ii) during the period commencing on August 15, 2028, and prior to the close of business on the second scheduled trading day immediately preceding February 15, 2029, at any time; and (iii) during the 35 trading days following the effective date of certain fundamental change transactions that occur prior to the close of business on the trading day immediately preceding August 15, 2028.
The Company will settle conversions by paying or delivering, as applicable, at the Company’s election, cash, common stock, par value $0.01 per share (“Common Shares”), or a combination of cash and Common Shares. The Company may not issue more than 19.99% of the issued and outstanding Common Shares immediately prior to the issuance of the Convertible Notes in respect of the conversion of the Convertible Notes. The initial conversion price of the Convertible Notes is $12.84, which corresponds to an initial conversion rate of approximately 77.88 Common Shares per $1,000 principal amount of Convertible Notes. The conversion price and conversion rate are subject to customary adjustments.
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 was set to mature one year from inception. Borrowings under the facility bore interest at the borrower’s option at a rate equal to (a) term SOFR, as defined in the facility, 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, as defined in the facility, at such time, (ii) one-half of 1.00% in excess of the Federal Funds Effective Rate, as defined in the facility, at such time, and (iii) Term SOFR for a one-month tenor in effect at such time plus 1.00%).
On March 8, 2024, Falcon renewed its working capital trade finance facility with multiple institutions. The facility size was reduced from $70.0 million to $55.0 million and remains uncommitted and repayable on demand, with certain of
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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, as defined in the facility, at such time, (ii) one-half of 1.00% in excess of the Federal Funds Effective Rate, as defined in the facility, at such time, and (iii) Term SOFR for a one-month tenor in effect at such time plus 1.00%). On August 21, 2024, Falcon amended its working capital trade finance facility. The amendment increased the facility size from $55.0 million to $75.0 million. The interest rates and maturity date were unchanged as a result of the amendment. At September 30, 2024, there was $48.5 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, 2024.
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, as defined in the facility, before the Quotation Day, as defined in the facility; or (b) the most recent applicable Term SOFR (as of the 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, 2024, there was $5.0 million of outstanding borrowings under the facility, of which $4.5 million and $0.5 million, is recorded in long-term debt, net and current maturities of long-term debt, respectively, 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, 2024.
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 $6.6 million at September 30, 2024 and (b) a long-term note payable with a balance of $0.8 million at September 30, 2024. Additionally, Rwanda Trading Company maintains two short-term futures contract-based lending facilities from international institutions with outstanding balances of $0.6 million and $2.4 million at September 30, 2024.
Supply Chain Finance Program
The Company is party to a supply chain finance program (the “Program”) with a third-party financing provider to provide better working capital usage by deferring payments for certain raw materials. Under the Program, the financing provider remits payment to the Company’s suppliers for approved invoices, and the Company repays the financing provider the amount of the approved invoices, plus a financing charge, on 180-day terms. The Program is uncommitted and the financing provider may, at its sole discretion, cancel the Program at any time. The Company may request cancellation of the Program in whole or in respect of one or more approved suppliers. Due to the extension of payment terms beyond the original due date of approved invoices, obligations under the Program are recorded outside of accounts payable, within our supply chain finance program, on our Condensed Consolidated Balance Sheets. As of September 30, 2024, there were $70.9 million obligations outstanding under the Program.
At-the-Market Common Stock Offering Program
We have an effective shelf registration statement on file with the SEC (the “Registration Statement”) to offer and sell various securities from time to time. Under the Registration Statement, we have established an at-the-market common stock offering program (the “ATM Program”) to sell shares of common stock not to exceed 5,000,000 Common Shares in the aggregate. During the nine months ended September 30, 2024, the Company sold 60,000 Common Shares under the ATM Program, resulting in net proceeds of $0.6 million. This program is intended to provide additional financial
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flexibility and an alternative mechanism to access the capital markets at an efficient cost as and when we need financing, including for acquisitions.
Current and Long-Term Liquidity
A key component of our long-term growth strategy is to complete the build-out of our extract and ready-to-drink manufacturing facility in Conway, Arkansas, which utilizes 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. During the second quarter of 2024, we commenced commercial production in a portion of the facility. We are continuing to build out the remaining portions of the facility and expect that the material capital expenditures related to the facility will be completed by the first quarter of 2025.
We believe proceeds from the Delayed Draw Term Loan Facility, Convertible Notes, cash from operations and borrowings available under the Revolving Credit Facility will provide sufficient cash on-hand 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, (v) continuing to drive margin expansion and (vi) completing the build-out of our extract and ready-to-drink manufacturing facility in Conway, Arkansas. 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.
Redemptions of Series A Preferred Shares
After February 26, 2028, 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 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 23,510,527 Series A Preferred Shares remain outstanding after February 26, 2028, we estimate an aggregate redemption payment of at least approximately $270.4 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.
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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 and Delayed Draw Term Loan Facility require quarterly principal payments of 1.25% of the original principal. Quarterly payments increase 1.875% and 2.5% of the original principal balance during the fourth and fifth years of the Credit Agreement, 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 $266.8 million as of September 30, 2024 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 $1.2 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, 2024 and 2023 were as follows:
Customer
Beverage
(Thousands)
Growth
Maintenance
Equipment
Other
Total
Nine months ended September 30, 2024
$
137,977
$
1,532
$
745
$
1,197
$
141,451
Nine months ended September 30, 2023
$
113,594
$
2,531
$
1,533
$
3,887
$
121,545
During the remainder of 2024, we expect to invest approximately $30.0 million to continue the build out of our extract and ready-to-drink product manufacturing facility 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 15, 2024.
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.