Freshpet, Inc. — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This is an annual report, not a standalone Q4 filing; selected Q4 results are shown separately below. Amounts are in U.S. dollars.
Business context
Freshpet manufactures and sells fresh, refrigerated dog and cat food and treats, primarily in the United States. Its retail model relies on company-owned Freshpet Fridges. At year-end, the network covered 21,570 stores, up from 19,499 a year earlier. The company operates one reportable segment.
Key financial results
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Net sales | $245.9 million | $193.2 million |
| Gross profit / margin | $114.2 million / 46.4% | $90.0 million / 46.6% |
| Operating loss | $0.3 million | $4.9 million |
| Net loss | $1.4 million; $0.04 per share | $5.4 million; $0.15 per share |
| Operating cash flow | $16.3 million | $18.6 million |
| Capital expenditures | $70.6 million | $16.3 million |
| Cash and cash equivalents at year-end | $9.5 million | $7.6 million |
| Debt at year-end | $54.5 million | None |
| Working capital at year-end | $12.3 million | $12.7 million |
Q4 2019: Net sales were $65.8 million versus $51.6 million in Q4 2018; gross margin was 46.0% versus 45.2%. Net income was $4.6 million versus $1.8 million.
Non-GAAP measures: Adjusted EBITDA was $29.2 million (11.9% of sales), compared with $20.3 million (10.5%) in 2018. Adjusted gross profit margin was 49.4%, down from 50.2%; adjusted SG&A was 37.6% of sales, down from 39.7%. These company-defined measures supplement, and are not substitutes for, GAAP results.
Changes and drivers
- Annual sales increased 27.2%, driven by higher sales velocity and 10.6% growth in Freshpet Fridge locations. Grocery, online, mass and club sales rose to $206.6 million; pet specialty and natural sales reached $39.3 million.
- Gross margin declined 20 basis points. Management cited scrapping and processing costs, commodity and inbound freight inflation, and labor costs ahead of seven-day production, partly offset by pricing and mix, depreciation leverage and production efficiencies.
- SG&A rose 20.6% in dollars, including higher media investment and volume-related costs, but declined as a share of sales. Management attributed improved operating results to sales growth and SG&A leverage.
- Operating cash flow decreased despite improved earnings, while investing cash outflows increased sharply with factory expansion and refrigerator spending. Financing cash flow included $72.3 million of credit-facility borrowings and $18.5 million of repayments.
Outlook, risks and unusual items
- No specific revenue or earnings guidance is provided in the filing. Management expects growth from distribution expansion, product innovation, marketing and manufacturing capacity; it expects SG&A leverage to continue, while acknowledging uncertainty.
- Freshpet converted its production lines to seven-day operation by January 2020. It was investing in Kitchens 2.0 and Kitchens South, with production start-up targeted for the second half of 2020 and combined investment described as $120 million. Management also anticipates approximately $300 million of future Kitchens 3.0 capital expenditures. The filing’s liquidity discussion describes approximately $370 million of expected capital expenditures across expansion projects. Funding is expected from operating cash flow, credit facilities and potentially debt or equity.
- At year-end, cash was $9.5 million and reported borrowing availability was $33.0 million, net of $2.0 million reserved for letters of credit. The senior secured facility matures in May 2024; borrowings bear variable rates and are subject to covenants. Further expansion may require additional financing and could dilute shareholders.
- Customer concentration is material: the largest distributor represented 17% of 2019 sales, and the largest customer represented 11%; ten customers collectively generated more than 70%. Supplier, co-packer and transportation reliance, manufacturing capacity, ingredient costs and product safety are also significant risks.
- Freshpet accrued a $10.1 million proposed settlement in the Curran securities case, subject to court approval, and recorded a $10.1 million insurance recovery as probable. A separate securities case, Meldon, remained pending; the company said it could not estimate a loss range.
- The company reported a full valuation allowance against deferred tax assets and approximately $198.1 million of federal NOL carryforwards, whose use may be limited. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether Kitchens 2.0 and Kitchens South reached start-up on schedule, achieved planned capacity and costs, and whether Kitchens 3.0 requires external financing.
- Current operating cash flow, capital spending, debt, borrowing availability and compliance with credit-facility covenants.
- Whether gross-margin pressures from commodities, freight, labor and production ramp-up persist, and whether sales growth and SG&A leverage offset them.
- The approval, payment and insurance recovery status of the $10.1 million Curran settlement, and developments in the Meldon litigation.
- Sales concentration and the resilience of key customer, supplier, co-packer and refrigerated transport relationships.