Freshpet, Inc. — FY2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023. This 10-K reports annual results; it does not provide clear standalone fourth-quarter financial results.
Business context
Freshpet manufactures and sells refrigerated pet food and treats for dogs and cats, primarily in the United States. It operates as one reportable segment. Its growth model depends on consumer adoption, retail distribution and Freshpet Fridge placements, supported by investment in manufacturing capacity and marketing. At year-end, the company reported approximately 26,777 store locations and household penetration of about 11.5 million, with a target of 20 million households by 2027.
Financial performance and liquidity
| Metric | FY2023 | FY2022 |
|---|---|---|
| Net sales | $766.9 million | $595.3 million |
| Gross profit / gross margin | $250.9 million / 32.7% | $186.0 million / 31.2% |
| SG&A / % of sales | $281.3 million / 36.7% | $238.0 million / 40.0% |
| Operating loss | $(30.4) million | $(52.0) million |
| Net loss | $(33.6) million | $(59.5) million |
| Operating cash flow | $75.9 million | $(43.2) million |
| Cash and cash equivalents at year-end | $296.9 million | $132.7 million |
Sales increased 28.8% year over year, primarily from volume growth of 20%; Grocery, Mass and Club generated $685.3 million, or 89% of sales. Adjusted EBITDA, a non-GAAP measure, was $66.6 million (8.7% margin), versus $20.1 million (3.4%) in 2022. Adjusted gross profit was $306.6 million (40.0% margin), versus $214.1 million (36.0%). These adjusted measures exclude specified expenses and are not substitutes for GAAP results or cash flow.
Net cash used in investing activities was $239.1 million, principally reflecting capacity expansion and other capital spending. The company reported approximately $239.1 million of 2023 capital expenditures and expects about $210 million in 2024. Working capital was $338.1 million at year-end, compared with $172.4 million a year earlier.
In March 2023, Freshpet issued $402.5 million principal amount of 3.00% convertible senior notes due 2028. The notes had a $393.1 million carrying value at year-end, net of issuance costs; the company also spent $66.2 million on capped calls intended to reduce potential conversion dilution, subject to a cap. The prior credit agreement was terminated in March 2023 with no borrowings outstanding. Year-end liabilities also included $28.1 million of finance lease liabilities.
Changes, outlook and notable items
- Gross margin improved by 1.5 percentage points, attributed mainly to plant-expense leverage, lower quality costs, and lower input costs as a share of sales, partly offset by expansion-related depreciation and equipment disposal costs.
- SG&A declined as a share of sales, helped by lower logistics costs relative to sales, reduced ERP implementation costs, and scale efficiencies. Higher media spending, activism-related advisory fees and variable compensation partly offset those improvements. Advertising expense rose to $97.9 million from $71.7 million.
- Operating cash flow improved from an outflow to an inflow. Management attributes 2022’s outflow substantially to working-capital changes; investors should consider working-capital movements alongside the improvement.
- Ennis, Texas, commissioned two additional production lines in 2023, completing Phase 1. The first Phase 2 line was expected to begin production by the end of Q3 2024; further Phase 2 and Phase 3 work is planned over several years. The filing does not provide specific revenue or earnings guidance.
- Management said existing liquidity, expected operating cash flow and capital-market access should fund operations and obligations for at least the next 12 months, while noting this depends on revenue, cash generation, cost control and working capital.
- Customer concentration is significant: Walmart represented 23.4% of 2023 net sales; the largest distributor represented 9.0%, and ten customers collectively represented approximately 73.1%. One supplier provided about 29% of raw materials.
- A distributor, Phillips Feed Service, claims damages exceeding $8.3 million in a disputed termination-related lawsuit; Freshpet disputes the claims and has counterclaimed. A non-jury trial was scheduled for September 2024. Management did not expect the matter to have a material adverse effect, while acknowledging an unfavorable outcome could be materially adverse.
- Key risks include execution and timing of capacity expansion, matching supply to demand, input-cost inflation and availability, competitive pricing, reliance on major customers and suppliers, food safety and product claims, ERP/system risks, and financing or dilution needs. The company disclosed a voluntary single-lot recall in 2022 related to potential salmonella contamination and said it received no reports of harm.
Most important facts to verify
- Whether Ennis expansion milestones and the approximately $210 million 2024 capital-spending plan were achieved, and how they affect capacity utilization and returns.
- Whether operating cash flow and margins improve sustainably, including the contribution of pricing, volume, logistics savings and working-capital changes.
- The terms and potential dilution of the 2028 convertible notes, including conversion conditions and the capped-call protection limits.
- Exposure to major customers and suppliers, and any changes in their purchasing, payment or supply arrangements.
- The status and financial exposure of the Phillips litigation, and any other material legal, product-safety or regulatory developments.
- Whether federal, state and foreign net operating losses can be used: the company reported substantial NOL carryforwards but a full valuation allowance and potential Section 382 limitations.
Audit and controls: KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting; management also concluded disclosure controls were effective at the reasonable-assurance level.