Freshpet, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; comparisons are with the three months ended March 31, 2023 unless otherwise noted. Dollar amounts are in millions, except per-share data. Freshpet manufactures and markets refrigerated fresh pet food and treats; it reported as a single operating segment.
Financial performance
| Metric | Q1 2024 | Q1 2023 |
|---|---|---|
| Net sales | $223.8 | $167.5 |
| Gross profit / gross margin | $88.2 / 39.4% | $50.8 / 30.3% |
| Operating income (loss) | $8.5 | $(21.5) |
| Net income (loss) | $18.6 | $(24.8) |
| Diluted EPS | $0.37 | $(0.52) |
| Cash from (used in) operations | $5.4 | $(13.7) |
| Capital expenditures | $46.5 | $58.0 |
| Adjusted EBITDA (non-GAAP) | $30.6; 13.7% margin | $3.0; 1.8% margin |
Sales grew 33.6%, primarily from volume gains of 30.6%. Grocery, Mass, International and Digital sales rose to $184.4 million from $140.2 million; Pet Specialty and Club sales rose to $39.4 million from $27.3 million. Management attributed gross-margin improvement mainly to better plant-cost leverage, lower quality costs and lower input costs as a percentage of sales. SG&A increased to $79.7 million from $72.3 million, but declined to 35.6% of sales from 43.1%, reflecting lower logistics and media costs as a share of sales and lower share-based compensation.
Net income included a $9.9 million non-cash gain from revaluing an investment in a privately held company after an observable equity funding transaction. Excluding that gain and other adjustments, Freshpet reported non-GAAP Adjusted EBITDA of $30.6 million, up from $3.0 million. Non-GAAP measures are company-defined and should not be viewed as substitutes for GAAP results or cash flow.
Financial position and liquidity
- Cash and cash equivalents were $257.9 million at March 31, 2024, down $39.0 million from year-end 2023. Working capital was $325.0 million, compared with $338.1 million at December 31, 2023.
- Operating cash flow was $5.4 million; investing cash outflow was $46.5 million, primarily for capital spending; financing cash inflow was $2.1 million, mainly from option exercises.
- Convertible senior notes had $402.5 million aggregate principal, a $393.6 million carrying amount and a 3.0% coupon; they mature April 1, 2028. The notes are unsecured. Their disclosed fair value was $707.9 million. Finance lease liabilities totaled $26.9 million.
- Management stated that cash, expected operating cash flow and access to capital markets, if appropriate, should fund operations, obligations and planned growth for at least the next 12 months. This depends on achieving anticipated revenue and cash flow and managing costs and working capital.
Outlook, risks and contingencies
Freshpet expects to spend an additional $163.5 million on capital expenditures during the remainder of fiscal 2024, principally for Freshpet Kitchens Ennis Phase 2 and 3 and other capacity needs. The filing does not provide clear numerical full-year revenue or earnings guidance. Management cited capacity expansion, including timely completion of the Ennis facility, as important to its growth plans.
Key risks include matching manufacturing capacity to demand, construction timing and benefits, stabilizing the ERP system, input-cost inflation and supply-chain disruption, consumer demand, competition, marketing effectiveness, and economic and interest-rate conditions. The company reported no material changes to previously disclosed risk factors. Management said disclosure controls and procedures were effective as of quarter-end and reported no material change in internal control over financial reporting during the quarter.
In a pending dispute with former distributor Phillips Feed Service, Phillips seeks more than $8.3 million in damages; Freshpet disputes the claims and has counterclaimed for amounts owed. A non-jury trial was scheduled for September 16, 2024. Management did not believe an unfavorable outcome was likely to have a material adverse effect based on information then available, but noted an unfavorable resolution could be materially adverse. The filing states ordinary-course claims are not expected to have a material adverse effect.
Most important facts for investors to verify
- How much of the earnings improvement is supported by recurring operations versus the $9.9 million investment revaluation gain.
- Whether gross-margin gains and operating cash generation continue as Freshpet expands capacity and manages working capital.
- Progress, timing and remaining costs for the Ennis expansion, including the expected $163.5 million of remaining 2024 capital spending.
- Liquidity and potential dilution or cash settlement exposure related to the 2028 convertible notes; holders had an early-conversion right exercisable during Q2 2024, with no conversions reported as of the filing date.
- Developments in the Phillips litigation, scheduled for trial in September 2024.