Vital Farms, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended December 27, 2020 (52 weeks); comparison is to the 52 weeks ended December 29, 2019. The filing is an annual report, not a standalone fourth-quarter report. Financial statements received an unqualified audit opinion from KPMG.
Business context
Vital Farms sells pasture-raised eggs, butter and related products, primarily through retail. Eggs remained the core business, representing about 92% of FY2020 net revenue. The company reported distribution in more than 16,000 stores and sourced products from a network of more than 200 small family farms. It is a Delaware public benefit corporation.
Financial results and liquidity
| Metric | FY2020 | FY2019 |
|---|---|---|
| Net revenue | $214.3 million | $140.7 million |
| Gross profit | $74.5 million | $42.9 million |
| Gross margin | 34.8% (reported as 35%) | 30.5% (reported as 30%) |
| Operating income | $12.2 million | $3.4 million |
| Net income | $8.9 million | $3.3 million |
| Net income attributable to Vital Farms stockholders | $8.8 million; diluted EPS $0.27 | $2.4 million; diluted EPS $0.07 |
| Adjusted EBITDA (non-GAAP) | $16.8 million | $6.4 million |
| Cash from operations | $11.7 million | $(5.4) million |
Revenue increased 52%, primarily from higher egg and butter sales volumes, new distribution and pandemic-related increases in at-home staple purchases. Gross margin rose 431 basis points, mainly from lower egg and butter material costs and modest production-cost leverage. SG&A increased 61% to $47.4 million, including higher staffing, public-company costs and offering-related expenses; shipping and distribution costs rose 49% to $14.9 million.
At year-end, cash and cash equivalents were $29.5 million and available-for-sale securities were $68.4 million. Current assets were $137.3 million versus current liabilities of $25.9 million. Long-term debt was zero after repayment of the credit facility in December; the company also repaid its equipment loan in September. Operating lease commitments were $5.3 million, and capital lease obligations were $0.8 million.
Cash used in investing was $77.8 million, primarily reflecting $68.4 million invested in available-for-sale securities and $10.3 million of property and equipment purchases. Financing provided $94.4 million, principally from $99.7 million of net IPO proceeds, partly offset by debt repayments. The company reported $30.1 million of net property, plant and equipment.
Material changes and unusual items
- FY2020 net revenue grew from $140.7 million to $214.3 million; egg and egg-related products contributed $196.7 million, versus $128.6 million in FY2019. Butter and related products contributed $17.6 million, versus $12.2 million.
- The August 2020 IPO generated approximately $99.7 million in net proceeds to the company. A November secondary offering was by selling stockholders; Vital Farms received no proceeds and incurred $0.5 million of expenses.
- The company recorded a $1.2 million litigation-settlement gain in FY2019, which benefited that comparison period. FY2020 included a $0.3 million write-off of construction in progress and a $0.3 million gain from a change in contingent consideration fair value.
- Fourth-quarter FY2020 net loss was $0.6 million, including an operating loss of $2.2 million. Full-year profitability therefore masks a loss in the final quarter.
- A December 2019 co-manufacturer recall of hard-boiled eggs due to potential listeria contamination caused a temporary supply interruption in early FY2020; the company said lost revenues were immaterial.
Outlook, risks and contingencies
No numerical revenue or earnings guidance is provided. Management expected adequate egg supply and packing capacity to meet anticipated FY2021 demand, while noting that pandemic-driven demand patterns may not persist. The company was expanding Egg Central Station to nearly double shell-egg capacity and expected the expansion to be operational in early 2022; it estimated approximately $25 million of expansion spending.
Management said year-end cash, operating cash flow and available credit were expected to fund operations for at least 12 months. The company had repaid its borrowings, while retaining a credit facility; future capital needs depend on growth, innovation and the facility expansion. The filing identifies COVID-19-related uncertainty, feed and packaging costs, seasonal demand, premium-price sensitivity, food safety and regulation, and reliance on a concentrated supply and distribution network as significant risks.
- All pasture-raised shell eggs are processed at one facility in Springfield, Missouri. Substantially all shell-egg cartons come from a sole-source supplier.
- The company is contractually committed to purchase farm egg production, including if sales are insufficient. Feed-cost changes affect purchase prices, and the company does not hedge feed ingredients.
- Eggs were about 92% of revenue. A limited number of distributors and retail customers account for significant sales; customer and distributor concentration shifted in 2020 as Whole Foods distribution moved from UNFI to US Foods.
- COVID-19 boosted at-home demand, but management stated that continuation of these trends was uncertain. Pandemic disruption also affected pasture-raised milk suppliers, though no impact on butter or ghee order fulfillment was reported in FY2020.
- The company is a public benefit corporation and cautions that its obligation to balance stakeholder interests may not maximize stockholder value in every decision. It was undergoing B Corp recertification; its designation remained in good standing during the process.
- The company disclosed ordinary-course legal claims but said it was not currently party to material litigation and did not expect current matters to have a material adverse effect.
Important facts for investors to verify
- Whether elevated egg demand and revenue growth continue as pandemic-related at-home purchasing recedes, and how FY2021 results compare with the unusually strong FY2020 base.
- Actual cost, schedule and capacity benefits of the Egg Central Station expansion, including the expected approximately $25 million investment and early-2022 operating target.
- Gross-margin sensitivity to feed, packaging and other input costs, and the company’s ability to pass cost increases through without reducing volumes.
- Progress in diversifying egg processing, carton sourcing, co-manufacturers, farms, distributors and major retail customers.
- Quarterly profitability and cash conversion, particularly the FY2020 fourth-quarter operating loss and the effects of working-capital needs as sales grow.
- Potential dilution from equity awards and the 2020 incentive plan; the filing reported 5.8 million outstanding options at year-end and additional shares available for grant.