Freshpet, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. The filing is an annual report, not a standalone Q4 filing; it also reports unaudited quarterly results. Amounts below are in U.S. dollars.
Business context and reporting period
Freshpet manufactures and sells fresh, refrigerated dog and cat food and treats, primarily in North America. Its model combines company-operated manufacturing with a network of branded retail refrigerators. At year-end, products were carried in approximately 22,716 stores, and the company reported household penetration of approximately 4 million.
Financial performance
| Metric | FY2020 | FY2019 |
|---|---|---|
| Net sales | $318.8 million | $245.9 million |
| Gross profit | $132.9 million | $114.2 million |
| Gross margin | 41.7% | 46.4% |
| SG&A expenses | $134.9 million | $114.5 million |
| Operating loss | $2.0 million | $0.3 million |
| Net loss | $3.2 million | $1.4 million |
| Adjusted EBITDA (non-GAAP) | $46.9 million; 14.7% of sales | $29.2 million; 11.9% of sales |
| Cash from operating activities | $21.2 million | $16.3 million |
| Cash used in investing activities | $162.5 million | $70.6 million |
| Cash and cash equivalents at year-end | $67.2 million | $9.5 million |
| Debt outstanding at year-end | $0 | $54.5 million |
Full-year sales increased 29.7%, driven by sales velocity and a 5.3% increase in store count. Gross margin fell 470 basis points, which management attributed to plant start-up costs, COVID-related costs, higher processing and depreciation/share-based compensation costs, and beef input costs; price and mix provided a partial offset. Adjusted EBITDA is a non-GAAP measure and excludes specified expenses; it is not a substitute for GAAP profit or cash flow.
Q4 2020: Net sales were $84.5 million, up from $65.8 million in Q4 2019. The quarter recorded an operating loss of $3.1 million and a net loss of $3.3 million, compared with operating income of $4.9 million and net income of $4.6 million in Q4 2019.
Liquidity, debt and investment
Year-end working capital was $76.0 million, compared with $12.3 million a year earlier. Operating cash flow was $21.2 million; investing outflows included manufacturing expansion, refrigerator investment, and a $27.9 million equity-method investment. Financing provided $199.0 million, including $252.1 million net proceeds from a common-stock offering, partly offset by repayment of $76.0 million of credit-facility borrowings. The company reported $163.0 million of available borrowing capacity under its year-end facilities, net of letters of credit.
Freshpet said it expected approximately $700 million of capital expenditures for its manufacturing expansion plans. On February 19, 2021, after year-end, it entered into a new $350 million senior secured credit facility, including a $300 million delayed-draw term loan and a $50 million revolver, maturing in 2026. Availability and use are subject to agreement conditions and covenants.
Material changes, outlook and risks
- COVID-19 prompted a demand surge beginning late in Q1 2020; Freshpet initially could not fulfill all orders. The company reported $3.9 million in COVID-related expenses and said it expected to rebuild trade inventory and reduce out-of-stocks in the first half of 2021.
- Management raised its 2025 household-penetration target from 8 million to 11 million. Capacity projects include Bethlehem, South, and Ennis; stated production schedules and project spending are forward-looking expectations, not guarantees.
- Q4 2020 results were negatively affected by winter storms that disrupted distribution in the Northeast.
- Principal risks include execution and cost of capacity expansions, matching production to demand, COVID-19 and supply-chain disruption, ingredient and freight cost volatility, customer and distributor concentration, competition, product safety and labeling claims, and the substantial capital required for growth.
- Management said available cash, expected operating cash flow, borrowing capacity, and potential capital-market access were expected to fund needs for the foreseeable future, while cautioning that cash generation and financing availability are uncertain. The company provided no numerical sales or earnings guidance in the supplied filing text.
Important facts for investors to verify
- Whether the capacity build-out, including project costs and production timelines, remains on schedule and within budget.
- Whether sales growth can continue as pandemic-related demand and inventory patterns normalize, and whether retail out-of-stocks decline as expected.
- Whether gross margins recover from FY2020 levels as start-up, COVID-related, processing, and ingredient costs change.
- How the new credit facility is drawn and used, and whether its covenants, interest costs, and planned capital expenditures leave adequate liquidity.
- The sustainability of Adjusted EBITDA improvement, given the exclusions for start-up, COVID-related, share-based compensation, and other costs.
- Exposure to major customers, distributors, suppliers, and transportation providers, alongside product-safety, labeling, and legal contingencies.