Freshpet, Inc. — Form 10-Q Summary
Reporting period: Three months ended March 31, 2021. Freshpet manufactures and markets refrigerated fresh pet food and treats, sold through retail channels using its branded in-store refrigerators. Results are unaudited and in U.S. dollars; amounts below are in millions unless stated otherwise.
Financial results and liquidity
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Net sales | $93.4 | $70.1 |
| Gross profit / margin | $36.3 / 38.9% | $31.8 / about 45.4% |
| Operating loss | $(9.7) | $(2.9) |
| Net loss | $(10.9) | $(3.6) |
| Net loss per share, diluted | $(0.26) | $(0.10) |
| Net cash used in operating activities | $(5.5) | $(2.5) |
| Net cash used in investing activities | $(49.3) | $(54.2) |
| Adjusted EBITDA (non-GAAP) | $7.8 | $5.7 |
Sales increased 33.3% year over year. Grocery, online, mass and club sales were $79.1 million; pet specialty and natural sales were $14.3 million. Freshpet Fridge locations rose 4.7% to 22,890. Adjusted EBITDA margin was 8.3%, versus 8.2%; these non-GAAP measures are not substitutes for GAAP results.
At March 31, cash and equivalents were $341.0 million, working capital was $350.2 million, and total liabilities were $52.6 million. Freshpet had no borrowings under its credit facility; $348.0 million was available, net of letters of credit. The $350 million senior secured facility comprises a $300 million delayed-draw term facility and a $50 million revolver, and matures in 2026. The quarter’s $332.5 million net equity-offering proceeds drove the increase in cash and expanded share count.
Material changes and drivers
- Gross margin fell 650 basis points to 38.9%. Management attributed the decline to higher depreciation and share-based compensation, plant start-up costs, beef-related ingredient inflation, under-absorbed costs and write-offs associated mainly with February snowstorms, COVID-19 costs, and increased processing costs at Kitchens South.
- SG&A rose 32.8% to $46.0 million, broadly tracking sales as a share of revenue (49.3% versus 49.5%). Higher variable freight and volume-related costs, operating and selling expenses, depreciation, and stock-option expense were partly offset by lower media expense.
- Operating cash use increased to $5.5 million, with working-capital movements—including receivables, inventory and accrued expenses—contributing to cash use. Capital spending remained substantial, including $40.3 million attributed to the Ennis expansion.
- Share-based compensation was $6.2 million, up from $2.2 million. The equity offering issued 2.415 million shares, before other share activity.
Outlook, risks and contingencies
- No specific revenue, earnings or margin guidance for 2021 is provided. Freshpet says Kitchens 2.0 is expected to reach full capacity by mid-2021; the project is expected to cost $115 million, with about $106.2 million invested by quarter-end.
- The company expected the first phase of Kitchens South to be completed by year-end 2021 and a second phase by the start of 2023, with about $180 million of additional investment expected from Q2 2021 through 2023. Initial production at Kitchens Ennis was expected in the first half of 2022; projected project cost was $530–$600 million, with about $71.4 million invested to date. Freshpet estimated approximately $700 million of future capital expenditures for its kitchen expansion projects.
- Management cited continuing COVID-related costs and uncertainty, elevated out-of-stocks and trade-inventory rebuilding, capacity execution and construction risks, supply-chain constraints, and ingredient inflation—particularly beef. It said chicken prices were contractually fixed, subject to limited exceptions, and that it had not experienced extended supply interruptions to date.
- Other disclosed risks include reliance on growth and customer demand, matching manufacturing capacity to demand, competition, customer concentration, product safety and regulatory matters, commodity costs, and access to future financing. The credit facility is secured and includes financial and other covenants.
- Ordinary-course legal claims, mostly covered by insurance, were not expected to have a material adverse effect; the filing cautions that a significant rise in claims or payments could be adverse. The company reported no material changes to previously disclosed risk factors and no material off-balance-sheet arrangements.
Important facts for investors to verify
- Whether new kitchen capacity comes online on schedule and at expected cost, and whether it reduces out-of-stocks and start-up inefficiencies.
- Whether sales growth translates into sustained gross-margin improvement as ingredient, freight, labor and production costs evolve.
- How much of operating performance and adjusted EBITDA depends on excluded costs, especially share-based compensation, start-up expenses, COVID-19 costs and capital needs.
- Whether operating cash flow and available liquidity can support the stated expansion plans without further equity issuance or borrowing.
- Progress on the Ennis and South projects, including actual spending versus estimates and the impact of any delays or cost overruns.