Freshpet, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; Q4 ended December 31, 2018. The filing was dated February 28, 2019. Freshpet manufactures and sells fresh, refrigerated pet food and treats, principally in North America. Its products are merchandised through approximately 19,500 company-owned Freshpet Fridges.
Financial results and key metrics
| Metric | FY2018 | FY2017 | Change / context |
|---|---|---|---|
| Net sales | $193.2 million | $152.4 million | Up 26.8% |
| Gross profit / margin | $90.0 million / 46.6% | $72.4 million / 47.5% | Profit up 24.3%; margin down 90 basis points |
| SG&A | $94.9 million | $75.2 million | Up 26.2%; 49.1% of sales versus 49.3% |
| Operating loss | $4.9 million | $2.8 million | Loss widened |
| Net loss | $5.4 million | $4.3 million | Loss widened; diluted loss per share was $0.15 versus $0.12 |
| Operating cash flow | $18.6 million | $10.3 million | Increased $8.3 million |
| Capital expenditures | $16.3 million | $13.0 million | Primarily plant and Freshpet Fridge investment |
| Adjusted EBITDA (non-GAAP) | $20.3 million; 10.5% of sales | $17.6 million; 11.5% of sales | Amount increased, margin declined |
At year-end, cash and cash equivalents were $7.6 million, working capital was $12.7 million, and total debt was zero. The company had $30 million available under its revolving credit facility, which matures in September 2020; it borrowed and repaid $6 million during 2018. Total assets were $140.0 million and stockholders’ equity was $121.5 million. The company reported no off-balance-sheet arrangements.
Q4 performance: Net sales were $51.6 million, up approximately 29.7% from $39.8 million in Q4 2017. Gross profit was approximately $23.4 million and gross margin was 45.2%, compared with $18.9 million and 47.6% a year earlier. Net income was $1.76 million versus $1.51 million. The filing’s quarterly table reports Q4 gross profit as $23.367 million, while another presentation shows $23.368 million.
Material changes and business developments
- Sales growth reflected higher product velocity and an 8.3% increase in Freshpet Fridge locations, from 18,004 to 19,499. Grocery, online, mass and club sales were $158.5 million; pet specialty and natural sales were $34.7 million.
- Gross margin declined mainly from higher raw-material costs and labor costs ahead of expanded seven-day production. Scale, production efficiencies and depreciation leverage partly offset those pressures.
- SG&A increased with higher media spending, including a $7.9 million increase in media spend, as well as volume-related freight, brokerage and personnel costs. Management’s Feed the Growth initiative increased advertising investment.
- Operating cash flow improved, while capital spending rose to $16.3 million. The company planned approximately $100 million of manufacturing-capacity investment over the following two years.
Outlook, risks and unusual items
Management gave no specific quantified revenue or earnings guidance. It expects growth from greater store penetration, higher sales velocity, marketing and new products. It converted one manufacturing line to seven-day production in the second half of 2018 and planned to convert two more in Q1 2019. Freshpet Kitchens 2.0, including a 90,000-square-foot addition and renovation of an existing building, was expected to begin production in the second half of 2020. Management estimates the expanded facility could support approximately $540 million in net sales; timing, cost and realized capacity remain execution risks.
- Liquidity and spending: Management considered cash, expected operating cash flow and borrowing capacity adequate for foreseeable requirements, while warning that cash generation and financing availability are not assured. The expansion plan creates substantial capital needs.
- Concentration and supply chain: Ten customers collectively represented more than 66% of 2018 sales; the largest distributor represented 16%. Fresh chicken was about half of ingredient volume, and the company relies on third parties for nearly all outbound shipments and for treat products.
- Operations and market risks: Risks include limited manufacturing capacity, expansion delays or cost overruns, ingredient and commodity price volatility, food-safety incidents or recalls, competition, and the effectiveness of marketing investment.
- Legal contingencies: Freshpet was defending two securities lawsuits, Curran and Meldon. It said the allegations were without merit, but could not estimate a reasonably possible loss range. Ordinary-course claims were also disclosed.
- Tax assets: Federal NOL carryforwards were approximately $183.3 million and state NOLs approximately $147.2 million; a full valuation allowance was recorded. Section 382 limitations could restrict use of the NOLs.
- Reporting and accounting: The company adopted ASC Topic 606 using full retrospective presentation; management reported no material impact on the financial statements. The auditor issued unqualified opinions on the financial statements and internal control, which was also reported effective by management.
Investor facts to verify
- Whether sales growth and Freshpet Fridge expansion continue, and whether new locations achieve expected sales and payback.
- Whether raw-material, labor and advertising costs stabilize sufficiently to improve GAAP gross margin and adjusted EBITDA margin.
- Progress, total spending and production timing for the approximately $100 million Kitchens 2.0 expansion.
- Cash-flow generation and available liquidity relative to planned capital expenditures and the September 2020 revolver maturity.
- Developments in the Curran and Meldon lawsuits, major-customer exposure, and reliance on concentrated suppliers and transportation providers.
- How management’s non-GAAP adjustments compare with GAAP results; adjusted EBITDA excludes, among other items, share-based compensation and certain growth-related costs.