Freshpet, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited consolidated results. Freshpet manufactures and markets refrigerated fresh pet food and treats. Comparisons are with Q1 2018 unless otherwise noted.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $54.8 million | $43.2 million | Up 26.9% |
| Gross profit / margin | $25.9 million / 47.3% | $20.1 million / 46.6% | Profit up 28.8%; margin up 70 bps |
| SG&A | $29.2 million | $23.5 million | Up 24.2%; 53.4% vs. 54.5% of sales |
| Operating loss | $3.3 million | $3.4 million | Loss narrowed by about $0.1 million |
| Net loss / diluted loss per share | $3.4 million / $0.10 | $3.5 million / $0.10 | Loss narrowed slightly |
| Net cash used in operating activities | $4.5 million | $0.2 million | Cash use increased |
| Capital expenditures and equipment deposits | $10.5 million | $5.0 million | More than doubled |
Sales growth came primarily from Grocery (including online), Mass and Club, which contributed $45.7 million, up from $34.9 million. Pet Specialty and Natural sales were $9.1 million, versus $8.3 million. Freshpet Fridge locations increased 9.7% to 20,053.
Gross margin improvement reflected higher pricing and favorable sales mix, depreciation leverage and production efficiencies, partly offset by commodity inflation, inbound freight and unabsorbed labor costs. SG&A rose mainly from $3.2 million of additional media spending, volume-related costs and higher operating expenses. Adjusted EBITDA, a non-GAAP measure, was $2.8 million (5.1% of sales), compared with $1.8 million (4.2%); the filing cautions that this measure is not a substitute for GAAP results or discretionary cash flow.
Financial position and liquidity
At March 31, 2019, cash was $3.8 million, down from $7.6 million at year-end 2018. The company had $10.0 million outstanding under its revolving credit facilities and reported $20 million of remaining availability. Working capital was $2.6 million, down from $12.7 million at December 31, 2018. Total liabilities were $39.2 million and stockholders’ equity was $120.5 million.
Investing cash outflow was $10.5 million, including approximately $4.9 million for the Freshpet Kitchens expansion. Financing cash inflow of $11.1 million included $10.0 million of credit-facility borrowings and $1.8 million from option exercises, partly offset by $0.7 million of tax withholdings on vested restricted stock units. The revolver matures in September 2020; rates are variable.
Outlook, risks and notable items
- Capacity investment: Freshpet is building a 90,000-square-foot manufacturing addition, Freshpet Kitchens 2.0. The planned strategic investment is approximately $100 million, with production start-up targeted for the second half of 2020 and stated facility capacity of approximately $540 million in net sales. The company spent $4.9 million on the project in Q1 and $6.9 million to date.
- Capital and liquidity: Management expects approximately $100 million in capital expenditures over the next two years and believes cash, operating cash flow and planned borrowing capacity will fund foreseeable needs. It cautions that funding depends on revenue, cash generation and cost and working-capital management; additional financing may be needed and may not be available on favorable terms.
- Operating risks: Risks include execution and timing of the capacity expansion, limited manufacturing capacity, commodity and ingredient price volatility, supply-chain management, competition, marketing effectiveness, and product or regulatory issues. A 100-basis-point rate change would affect annual interest expense by approximately $0.1 million on the debt outstanding at quarter-end.
- Litigation: Two securities lawsuits remained pending. The company disputes the allegations but said it could not estimate a reasonably possible loss range. Other ordinary-course claims were not expected to have a material adverse effect.
- Accounting: Freshpet adopted lease accounting standard ASC 842 on January 1, 2019, recognizing $9.4 million of operating lease right-of-use assets and $9.7 million of lease liabilities at March 31. Prior-period figures were not restated. No material change to previously disclosed risk factors was reported.
- Guidance: The filing provides no specific revenue, earnings or margin guidance. The quarterly results are not necessarily indicative of full-year results.
Investor verification priorities
- Track Kitchens 2.0 construction, total spending, start-up timing and realized capacity versus the stated plan.
- Assess whether sales growth and new fridge placements translate into improved operating profitability and cash generation.
- Monitor working-capital needs, capital spending, remaining revolver availability and debt maturity in September 2020.
- Review commodity, freight and labor cost trends and their effect on gross margin.
- Follow developments in the securities lawsuits, for which the company disclosed no estimable loss range.