Freshpet, Inc. — FY 2021 Form 10-K
Business context and reporting period. This is an annual report for the fiscal year ended December 31, 2021, not a standalone fourth-quarter report. Freshpet makes and sells fresh, refrigerated pet food and treats, primarily in North America, using company-owned manufacturing facilities and retail refrigerators. The company reported one operating segment.
Financial performance and liquidity
| Metric | FY 2021 | FY 2020 |
|---|---|---|
| Net sales | $425.5 million | $318.8 million |
| Gross profit / GAAP gross margin | $162.1 million / 38.1% | $132.9 million / 41.7% |
| Operating loss | $24.7 million | $2.0 million |
| Net loss | $29.7 million; $0.69 per diluted share | $3.2 million; $0.08 per diluted share |
| Operating cash flow | $0.6 million | $21.2 million |
| Investing cash flow | $(322.1) million | $(162.5) million |
| Financing cash flow | $327.0 million | $199.0 million |
| Cash and cash equivalents at year-end | $72.8 million | $67.2 million |
- Sales grew 33.5%, driven by sales velocity and distribution expansion. Retail locations with Freshpet Fridges increased 4.0%, to 23,631 from 22,716.
- GAAP gross margin fell 360 basis points. Management cited higher plant costs, wages and capacity-related investment, ingredient inflation, depreciation and share-based compensation; lower start-up and COVID-19 costs partly offset these pressures.
- Non-GAAP adjusted gross margin was 44.5%, down from 48.3%; adjusted EBITDA was $43.0 million, down from $46.9 million, and its margin declined to 10.1% from 14.7%. These company-defined measures exclude specified costs and should not be viewed as substitutes for GAAP results.
- SG&A rose 38.5% to $186.8 million, faster than sales, reflecting higher freight and other variable costs, media spending, share-based compensation and employee costs. Share-based compensation expense was $25.0 million, versus $10.9 million in 2020.
- Working capital was $91.4 million, compared with $76.0 million. The company had no borrowings under its credit facilities at year-end and reported $348.0 million available under the $350.0 million facility, net of letters of credit. The facility matures in February 2026.
- Capital spending drove the $322.1 million investing outflow, including spending on Freshpet Kitchens South and Ennis. The company reported $332.2 million in net proceeds from a common-stock offering in financing activities.
Changes, outlook and risks
- Management said household-penetration growth in 2021 was below its historical rate. Penetration was approximately 4 million North American households, against a stated target of 11 million by 2025.
- Two price increases were announced in late 2021 to address inflation in inputs, logistics and labor. Management characterized any initial household-penetration effect as a short-term setback and expected buying rates to benefit over time; results will depend on consumer response and successful price pass-through.
- Freshpet expected initial production at Freshpet Kitchens Ennis in the third quarter of 2022. It estimated approximately $219 million of future capital expenditures to complete planned projects, including Ennis Phase 1, Ennis Chicken Processing and Freshpet Kitchens South. Ennis Phase 1 had incurred approximately $243.6 million against a $335 million budget by year-end 2021.
- Key risks include execution and timing of capacity expansions, matching production to demand, inflation and availability of ingredients, packaging, labor and freight, supply-chain disruption, competition and consumer price sensitivity. The company also cited COVID-19 uncertainty, customer concentration, reliance on third-party transport, product safety and regulatory or marketing claims, and potential constraints on financing.
- The largest distributor accounted for 16% of 2021 net sales; Target accounted for 8% in the company’s business discussion. Ten customers purchasing directly or through distributors collectively represented approximately 70% of sales. One supplier represented approximately 21% of raw-material purchases.
- The company reported a $2.0 million loss on its 19% equity-method investment in a privately held company. It also disclosed ongoing ordinary-course claims and a previously settled shareholder derivative case; management did not expect current claims to have a material adverse effect. The auditor issued an unqualified opinion on the financial statements and internal controls, and identified assessment of performance-based share-award vesting probabilities as a critical audit matter.
Important facts for investors to verify
- Whether price increases offset persistent input, labor and freight inflation without materially weakening sales velocity or household penetration.
- Construction spending, project budgets and commissioning progress for Ennis and other capacity expansions, together with the resulting production utilization and margins.
- Cash generation and liquidity as capital expenditures remain substantial; operating cash flow fell to $0.6 million despite sales growth.
- The causes and sustainability of the declines in GAAP and adjusted margins and adjusted EBITDA; review the company’s non-GAAP definitions and reconciliations.
- Customer, distributor and supplier concentration, including the distinction between direct customers and sales routed through distributors.