Freshpet, Inc. — FY 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022; filed February 28, 2023. The filing is an annual report, not a standalone fourth-quarter filing. Unless otherwise noted, amounts are in U.S. dollars.
Business context
Freshpet manufactures and sells fresh, refrigerated dog and cat food and treats through grocery, mass, club, pet specialty and natural retailers. Its model relies on company-owned Freshpet Fridges in retail stores and expanding manufacturing capacity. At year-end, products were in 25,281 stores; household penetration was approximately 4.9 million, with a stated target of 11 million households by 2025.
Financial performance and liquidity
| Metric | FY 2022 | FY 2021 |
|---|---|---|
| Net sales | $595.3 million | $425.5 million |
| Gross profit / margin | $186.0 million / 31.2% | $162.1 million / 38.1% |
| Operating loss | $52.0 million | $24.7 million |
| Net loss | $59.5 million | $29.7 million |
| Adjusted EBITDA / margin | $20.1 million / 3.4% | $35.0 million / 8.2% |
| Cash from operating activities | $(43.2) million | $0.6 million |
| Cash used in investing activities | $(233.4) million | $(322.1) million |
| Cash and cash equivalents at year-end | $132.7 million | $72.8 million |
| Working capital at year-end | $172.4 million | $91.4 million |
Sales increased 39.9%, driven by velocity gains, higher pricing and store expansion. Gross margin fell primarily because of plant start-up costs, ingredient and labor inflation, and quality issues; higher pricing and depreciation leverage partly offset these pressures. SG&A rose to $238.0 million, though it declined as a share of sales to 40.0% from 43.9%. Net loss widened amid higher SG&A, including increased media spending and plant start-up costs, and increased interest expense.
Capital expenditures were approximately $230.1 million in 2022, principally for the Ennis and South kitchen expansions, fridges and other capital needs. Net cash from financing was $336.5 million, including $337.5 million net proceeds from a common-stock offering. The company reported no credit-facility borrowings outstanding at year-end. Its senior secured facility totals $350 million, subject to covenants; reported availability was approximately $270 million, including $78 million remaining under the delayed-draw facility and $2 million reserved for letters of credit.
Material changes and unusual items
- Adjusted EBITDA fell to $20.1 million from $35.0 million, and its margin declined to 3.4% from 8.2%. These are non-GAAP measures and should be considered alongside GAAP results.
- Starting with the period ended September 30, 2022, Freshpet stopped excluding plant start-up and launch expenses from its non-GAAP measures, and recast prior periods for comparison. FY 2022 plant start-up expense was $26.1 million and launch expense was $4.1 million.
- Freshpet began production on one line at its Ennis, Texas facility in Q4 2022. It planned to commission two additional Phase 1 lines over the following 18 months.
- In June 2022, the company voluntarily recalled one lot of a product due to potential salmonella contamination. It reported no harm to pets or owners, but said the matter caused production delays and required management attention.
- The company issued and exercised warrants for 194,000 shares to operators of Freshpet Kitchens South as partial consideration under a supply agreement; the recorded value was approximately $9.8 million.
Outlook, risks and contingencies
- Management expected approximately $240 million of capital expenditures in 2023, including planned kitchen and capacity projects. This is spending guidance; the filing does not provide a clear 2023 revenue or earnings forecast.
- Management said existing cash, expected operating cash flow, borrowing capacity and potential capital-market access were expected to fund operations and obligations for at least the next 12 months, while cautioning that this depends on performance, cost control and liquidity access.
- The company was not in compliance with certain credit-facility financial covenants at September 30, 2022; lenders consented to the covenant tests not being applied at that date, and the company repaid the then-outstanding delayed-draw balance. It was compliant at year-end but warned it might not remain compliant in 2023. A breach without a waiver could make facility debt due or restrict access to the facility.
- Key risks include construction delays or capacity mismatch; persistent ingredient, labor, energy and freight inflation; dependence on major retailers and suppliers; competition and price sensitivity; product safety and regulatory matters; ERP implementation; variable interest rates; and the need to fund substantial expansion.
- Walmart represented 21.4% of 2022 net sales; the ten largest customers collectively represented approximately 64%. One raw-material vendor supplied approximately 33% of raw materials.
- Former distributor Phillips Feed Service sued, seeking more than $8.3 million plus additional damages; Freshpet disputed the claims and counterclaimed. Freshpet reclassified $8.971 million due from Phillips to other noncurrent assets. Management did not believe an adverse material effect was likely based on information then available, while acknowledging an unfavorable resolution could be materially adverse.
- The auditor and management concluded internal control over financial reporting was effective as of year-end; ERP implementation and transition work remained ongoing. The auditor identified assessment of performance-based share-award vesting probabilities as a critical audit matter.
Important facts for investors to verify
- Whether Freshpet can restore gross margins and improve cash generation as inflation and kitchen start-up costs evolve.
- Actual 2023 capital spending, project timing and production ramp at Ennis and other facilities, compared with the stated plan.
- Quarterly covenant compliance, borrowing availability and any amendments, waivers or financing needs.
- Customer and supplier concentration, including Walmart sales exposure and dependence on the largest raw-material vendor.
- Developments in the Phillips litigation, related receivable recovery and any further product-quality or recall events.
- Comparability of non-GAAP results after the change in treatment of start-up and launch expenses; FY 2022 Q4 Adjusted EBITDA was $18.8 million, while quarterly net loss was $2.9 million.