Freshpet, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Freshpet manufactures and markets refrigerated fresh meals and treats for dogs and cats. Figures below are in U.S. dollars; financial statement amounts are converted from thousands to millions unless noted.
Financial performance
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Net sales | $132.2 million | $93.4 million |
| Gross profit / gross margin | $44.8 million / 33.9% | $36.3 million / 38.9% |
| SG&A | $60.6 million | $46.0 million |
| Operating loss | $15.9 million | $9.7 million |
| Net loss / loss per share | $17.5 million / $0.40 | $10.9 million / $0.26 |
| Adjusted EBITDA (non-GAAP) / margin | $5.1 million / 3.9% | $7.8 million / 8.3% |
| Operating cash flow | $(34.8) million | $(5.5) million |
| Capital expenditures and investing cash flow | $55.9 million capex; $(59.2) million investing cash flow | $49.3 million investing cash flow |
Sales rose 41.5% year over year: management attributed $30.5 million of growth to volume, including trade-inventory replenishment, and $8.3 million to price and mix. Grocery, Mass and Club sales were $115.5 million; Pet Specialty and Natural sales were $16.7 million. Freshpet Fridge locations increased 4.5% to 23,931.
Adjusted gross profit was $55.4 million, or 41.9% of sales, versus $43.6 million, or 46.7%, in Q1 2021. Adjusted SG&A was $50.5 million, or 38.2% of sales, versus $35.9 million, or 38.4%. These are company-defined non-GAAP measures and are not substitutes for GAAP results.
Financial position and liquidity
- At March 31, 2022, cash was $29.7 million, down from $72.8 million at year-end 2021. Working capital was $46.5 million, down from $91.4 million.
- Accounts receivable increased to $61.5 million from $34.8 million; inventory rose to $45.3 million from $35.6 million. Management attributed higher receivables partly to the ERP transition, which increased receivables aging by about eight days.
- Debt outstanding was $51.0 million at March 31, including $4.8 million classified as current. The $350 million credit facility had $297 million available, reflecting $2 million reserved for letters of credit. Borrowings subsequently increased to $78 million by April 23.
- Property, plant and equipment, net, was $663.8 million, including $354.7 million of construction in progress. Accounts payable included $51.6 million of PP&E purchases.
Changes, outlook and risks
- Gross margin declined amid higher kitchen labor costs, investment to grow into capacity, and ingredient inflation; pricing increases partly offset those pressures. Management said price increases in Q4 2021 and Q1 2022 temporarily slowed household penetration growth, with more recent trends showing improvement. Further 2022 price increases could be considered depending on macroeconomic conditions.
- Management raised expected future capital expenditures for planned development from approximately $219 million to $400 million under an enhanced capacity plan. Targets include $1.25 billion of net sales by 2025 and capacity for up to $2.9 billion in net sales; the company explicitly states these are targets, not projections. It also cited a long-term target of approximately 25% Adjusted EBITDA margin by 2025.
- The April 29 credit agreement amendment adjusted capital-expenditure covenant mechanics and replaced LIBOR with Term SOFR for U.S. dollar loans. Management said cash, expected operating cash flow, borrowing capacity and potential capital-market access should fund needs for at least 12 months, while noting uncertainty around cash generation and financing availability.
- Key risks include execution and timing of manufacturing expansions, matching capacity to demand, inflation and input availability, supply-chain disruption, COVID-19 impacts, customer concentration, and the ability to fund growth. Variable-rate debt exposes the company to interest-rate changes. European sales were about 1% of Q1 revenue.
- Phillips Feed Service sued in April 2022 over termination of a distribution arrangement, seeking more than $8.3 million plus additional damages and asserting a setoff right. Freshpet had not yet filed its response; management did not expect a material adverse effect. Other ordinary-course claims were not expected to be material.
- The company reported effective disclosure controls. It transitioned to a new ERP system in Q1 and said the transition had not materially affected internal financial reporting controls, while control reviews continue.
Most important facts to verify
- Whether subsequent quarters show recovery in GAAP and adjusted margins as pricing, inflation, and manufacturing start-up costs evolve.
- Actual capital spending, construction timelines, borrowing needs, and progress toward the stated sales and margin targets.
- Whether receivables and operating cash flow normalize following the ERP transition and working-capital build.
- The debt balance, available facility capacity, and effects of variable interest rates and the Term SOFR amendment.
- The equity-method investment loss: the income statement reports $1.31 million for Q1, while MD&A describes a $2.0 million loss. The filing text does not clearly reconcile these values.
- Developments in the Phillips litigation, including the claimed damages and potential setoff.