Freshpet, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Unless otherwise noted, amounts below are in U.S. dollars and millions; financial statements are unaudited. Freshpet manufactures and markets refrigerated natural pet food and treats.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $108.6 | $80.0 | $202.0 | $150.1 |
| Gross profit | $43.1 | $33.9 | $79.4 | $65.7 |
| Gross margin | 39.7% | 42.4% | 39.3% | 43.8% |
| SG&A | $49.6 | $33.7 | $95.6 | $68.4 |
| Operating income (loss) | $(6.5) | $0.2 | $(16.2) | $(2.7) |
| Net income (loss) | $(7.5) | $0.2 | $(18.4) | $(3.4) |
| Basic and diluted EPS | $(0.17) | $0.00 | $(0.43) | $(0.09) |
| Adjusted EBITDA (non-GAAP) | $10.9 | $11.2 | $18.6 | $16.9 |
Q2 sales grew 35.8% year over year, with increases in Grocery, Mass and Club of $21.2 million and Pet Specialty and Natural of $7.4 million. Six-month sales grew 34.6%. Freshpet Fridge locations increased 4.7% year over year to 23,155.
Q2 gross margin fell 280 basis points. Management cited beef ingredient inflation, processing costs as new capacity ramps, higher depreciation and share-based compensation, and plant start-up costs; lower COVID-related costs partly offset the pressures. Six-month gross margin declined 450 basis points for similar reasons. Adjusted gross margin, a non-GAAP measure, was 46.1% in Q2 versus 49.1%, and 46.4% for the half versus 49.3%.
SG&A rose 47.0% in Q2 and 39.8% for the half, driven by higher variable and freight costs, share-based compensation, media, staffing and operating costs. Adjusted SG&A was 36.1% of Q2 sales versus 35.1%; for the half it improved to 37.2% from 38.0%. Adjusted EBITDA margin declined to 10.0% in Q2 from 14.0%, and to 9.2% for the half from 11.3%. These are company-defined non-GAAP measures and should be considered alongside GAAP results.
Cash, liquidity and capital
- Cash and cash equivalents were $280.3 million at June 30, 2021, versus $67.2 million at December 31, 2020. Working capital was $287.4 million, up from $76.0 million.
- For the first half, operating cash flow was $2.9 million, compared with cash used of $5.1 million in 2020. Investing cash outflow was $117.6 million, primarily capital spending; financing cash inflow was $327.7 million, principally net proceeds of $332.2 million from a February share offering.
- Capital expenditures and equipment deposits totaled $117.6 million in the first half. Property, plant and equipment, net, increased to $391.9 million from $281.1 million at year-end.
- The new senior secured credit facility totals $350 million: a $300 million delayed-draw term loan and $50 million revolving facility, maturing February 2026. No borrowings were outstanding at quarter-end; $348 million was available, with $2 million reserved for letters of credit. The facility is subject to covenants and variable interest rates.
- Total liabilities were $63.6 million, including $7.8 million in operating lease liabilities; the company reported no funded debt outstanding under its credit facility.
Outlook, plans and risks
Freshpet stated that it expects to fund operations and obligations with cash, operating cash flow and available credit, and believes these resources are adequate for the foreseeable future. It did not provide specific near-term revenue or earnings guidance in the supplied filing text.
The company expects approximately $675 million of future capital expenditures for its Kitchens expansion projects, intended to support estimated annual net sales capacity of approximately $2.0 billion. Freshpet Kitchens South phase one was expected to be completed by the end of 2021 and phase two by the start of 2023; the company expected to invest a further approximately $165 million in South from Q2 2021 through 2023. Freshpet Kitchens Ennis was expected to begin initial production in Q2 2022, with projected total project spending of $530–$600 million. These are forward-looking plans, not assured outcomes.
Management described continued COVID-19-related uncertainty, employee safety and operating costs, supply availability, higher beef prices, freight and ingredient inflation, and the challenge of matching manufacturing capacity to demand. Other identified risks include timely completion and benefits of expansion projects, customer concentration, competition, product safety and regulatory matters, access to capital, and potential dilution or financing constraints. Ordinary-course legal claims, mostly covered by insurance, were not expected to have a material adverse effect. The filing reported no material change to previously disclosed risk factors and no material change in contractual obligations.
Most important facts for investors to verify
- Whether sales growth and store expansion continue, and whether demand translates into stronger margins and operating profitability.
- Whether ingredient, freight and processing inflation, capacity ramp costs and elevated SG&A moderate as planned.
- Progress, timing, total cost and funding for the South and Ennis projects, including the stated capacity and production targets.
- Cash generation and working-capital needs as substantial expansion spending continues; first-half operating cash flow was modest relative to investment outlays.
- Terms, availability and covenant compliance for the secured credit facility, and the effects of the February 2021 equity issuance and share-based compensation on dilution.