Freshpet, Inc. — Q3 2022 Form 10-Q
Business context and reporting period. Freshpet manufactures and markets refrigerated fresh pet food and treats, sold through retail channels in the U.S., Canada and other markets. This unaudited filing covers the three and nine months ended September 30, 2022; comparisons are with the corresponding 2021 periods. Dollar amounts below are in millions unless noted.
Financial performance and liquidity
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $151.3 | $107.6 | $429.5 | $309.6 |
| Gross profit / gross margin | $44.5 / 29.4% | $41.5 / 38.6% | $140.3 / 32.7% | $120.9 / 39.1% |
| Operating loss | $(15.9) | $(0.8) | $(49.9) | $(17.0) |
| Net loss | $(18.4) | $(2.1) | $(56.6) | $(20.4) |
| Adjusted EBITDA and margin | $3.5 / 2.3% | $13.5 / 12.5% | $1.3 / 0.3% | $27.4 / 8.8% |
Sales rose 40.7% in Q3 and 38.7% for the nine-month period. For Q3, management attributed $25.0 million of the sales increase to price and mix and $18.7 million to volume, including trade-inventory replenishment. Grocery, Mass and Club accounted for most of the growth. Freshpet Fridge locations increased 5.4% year over year to 24,651.
Margin pressure was substantial despite higher sales. Management cited plant start-up costs, inflation in ingredients and labor, and quality issues, partly offset by pricing. Q3 SG&A was $60.4 million (39.9% of sales), versus $42.4 million (39.4%); nine-month SG&A was $190.2 million (44.3%), versus $138.0 million (44.6%). Q3 net loss also reflected higher media spending and plant start-up costs.
Cash used in operating activities was $53.7 million for the first nine months, compared with $3.3 million used in 2021. Investing activities used $190.6 million, including $167.4 million of capital expenditures. Financing provided $411.8 million, primarily from a $337.5 million common-stock offering and $78.0 million of credit-facility borrowings.
At September 30, cash and cash equivalents were $240.3 million, short-term investments were $19.9 million, and working capital was $252.5 million. The company reported $274.8 million available under its $350 million credit facility at quarter-end. It had $75.2 million outstanding under the delayed-draw facility; the balance sheet showed $72.9 million as current long-term debt, net of related issuance costs. Total liabilities were $135.6 million. Capital expenditures are a significant cash requirement: management expected approximately $290 million for FY 2022.
Material changes, outlook and risks
- Non-GAAP presentation changed: Beginning in Q3, Freshpet stopped adding back plant start-up and launch expenses in Adjusted Gross Profit, Adjusted SG&A and Adjusted EBITDA calculations. Prior periods were recast for comparability. Q3 2022 included $8.0 million of plant start-up costs and $1.5 million of launch costs that are no longer excluded from Adjusted EBITDA. These non-GAAP measures are supplemental and are not substitutes for GAAP results or cash flow.
- Pricing and operations: A third price increase of 2.6% took effect in September. Management said it had not seen an adverse effect on growth rates to date. The company was addressing logistics and supply chain, product quality and procurement/hedging, and expected improvement efforts to begin having positive impact in late 2022 and 2023.
- Capacity investment and liquidity: Planned projects include Freshpet Kitchens Ennis Phase 1, Ennis Chicken Processing and Freshpet Kitchens South. Management believed available liquidity would fund operations and obligations for at least 12 months, while noting that outcomes depend on revenue, cash generation, working-capital management and access to financing. No specific revenue or earnings guidance was provided in the filing text.
- Debt covenant event: At September 30, the company was not in compliance with total funded debt ratio and fixed charge coverage ratio covenants. Before the financial statements were issued, lenders consented not to test those covenants as of that date, and Freshpet repaid the $75.2 million delayed-draw balance in full. The facility matures in February 2026 and bears variable interest.
- Other risks and unusual items: The filing highlights inflation and commodity costs, supply-chain and capacity execution, quality and product/regulatory issues, customer concentration, and macroeconomic and foreign-exchange risks. Phillips Feed Service sued over termination of a distribution arrangement, seeking more than $8.3 million plus additional damages; Freshpet disputes the claims and counterclaimed for amounts owed. A $9.0 million receivable from Phillips was reclassified to other noncurrent assets. Freshpet also disclosed shareholder activism involving JANA Partners. It issued supplier/operator warrants for up to 194,000 shares, valued at approximately $9.8 million as partial consideration under a supply agreement.
Important facts for investors to verify
- Track whether pricing, volume and store expansion can sustain sales growth while recovering gross and Adjusted EBITDA margins.
- Monitor operating cash use, working capital and inventory growth, capital spending, and completion and ramp-up of the planned kitchen expansions.
- Confirm the post-repayment debt balance, covenant status, borrowing availability and interest costs in subsequent filings.
- Assess the outcome and recoverability of the Phillips dispute and reclassified receivable.
- Review reported GAAP results alongside the revised non-GAAP definitions, including the costs no longer excluded from adjusted measures.
- Monitor supply-chain, quality, ingredient-cost and capacity risks, as well as developments related to shareholder activism.