Freshpet, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; unaudited. Freshpet manufactures and sells refrigerated fresh pet food through grocery, mass, club, pet specialty and natural retailers. It reported 20,414 Freshpet Fridge locations at quarter-end.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Net sales | $60.1 million | $47.6 million | $114.8 million | $90.8 million |
| Gross profit / margin | $27.3 million / 45.5% | $22.9 million / 48.0% | $53.2 million / 46.4% | $43.0 million / 47.4% |
| Operating loss | $(5.3) million | $(3.4) million | $(8.7) million | $(6.8) million |
| Net loss | $(5.7) million; $(0.16) per share | $(3.5) million; $(0.10) per share | $(9.1) million; $(0.25) per share | $(7.0) million; $(0.20) per share |
| Adjusted EBITDA (non-GAAP) | $1.2 million | $2.5 million | $4.0 million | $4.3 million |
Q2 sales increased 26.1% year over year; first-half sales rose 26.5%. Grocery, online, mass and club generated 83% of sales in both periods, with growth across both reported retail groupings. In Q2, gross margin fell 250 basis points: higher scrapping and processing costs, commodity inflation and inbound freight outweighed price/mix gains and depreciation leverage. First-half gross margin declined 100 basis points for similar reasons, including unabsorbed labor ahead of expanded operations.
SG&A increased 24.3% in Q2 and 24.2% in the first half, largely due to higher media spending and volume-related costs. As a share of sales, SG&A improved modestly. Net losses widened year over year. Adjusted EBITDA and other adjusted measures are non-GAAP; Freshpet cautions they are not substitutes for GAAP results or measures of discretionary cash.
- Cash and working capital: Cash was $4.8 million at June 30, down from $7.6 million at December 31, 2018. Working capital was $13.2 million, versus $12.7 million.
- Cash flows, first half: Operating activities used $9.8 million, compared with $3.1 million provided in 2018; investing activities used $22.9 million, versus $8.9 million; financing activities provided $29.9 million, versus $4.7 million.
- Capital spending: The company reported $22.9 million of investing outflows, including $12.8 million for Freshpet Kitchens and $10.1 million for fridges and other capital spending. An additional $7.7 million of property and equipment purchases remained in accounts payable.
- Debt and liquidity: At June 30, $28.5 million was outstanding under the new credit facility ($3.5 million term loans and $25.0 million revolver); the filing reported $61.5 million available. The facility is senior secured, variable-rate, and matures May 15, 2024. July borrowings subsequently increased by $5.4 million.
- Other balance-sheet changes: Property, plant and equipment, net, rose to $122.4 million from $102.1 million at year-end. Adoption of lease accounting added $9.8 million of operating lease right-of-use assets and $10.1 million of lease liabilities at June 30; comparative periods were not restated.
Outlook, risks and notable items
The filing gives no specific revenue or earnings guidance. Management expects approximately $100 million of capital expenditures over the next two years for manufacturing capacity and distribution, and states that cash, expected operating cash flow and borrowing capacity should fund foreseeable needs. That assessment depends on achieving anticipated revenue and cash flow, managing costs and working capital, and maintaining financing access.
Freshpet Kitchens 2.0 is a planned 90,000-square-foot addition, part of a stated $100 million strategic investment intended to support facility capacity of approximately $540 million in net sales. Production start-up was slated for the second half of 2020. The company had invested $11.2 million in the project in the first half and spent $13.1 million to date. Three of four manufacturing lines had shifted to seven-day production, with the fourth conversion planned within 12 months; these changes added more than 140 employees.
Risks highlighted include execution and timing of the expansion, limited manufacturing capacity, input-cost and supply-chain volatility, ability to generate cash or raise capital, customer concentration, competition, product safety and regulation, and foreign-exchange movements. A 100-basis-point interest-rate change was estimated to affect annual interest expense by approximately $0.3 million on June 30 debt. Two securities lawsuits remained pending or stayed; the company disputed the allegations and said it could not estimate a reasonably possible loss range. It reported no material change to previously disclosed risk factors, and management concluded disclosure controls were effective.
Key investor verification points
- Track whether Freshpet Kitchens 2.0 meets its construction, cost and second-half 2020 start-up plans, and whether the stated capacity target is achieved.
- Monitor gross-margin recovery, particularly scrapping, processing, commodity, inbound freight and labor costs, alongside pricing and production efficiencies.
- Assess cash conversion and working-capital needs: first-half operating cash flow was negative and receivables and inventory increased.
- Reconcile the planned capital program with liquidity, facility availability, covenant compliance, and additional borrowing needs.
- Follow the progress and potential financial exposure of the securities litigation; the filing provides no loss estimate.
- Interpret adjusted EBITDA and other non-GAAP measures alongside GAAP losses, capital spending, debt service and working-capital requirements.