Freshpet, Inc. — 2015 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2015. This is an annual report, not a standalone fourth-quarter filing; quarterly figures are included below. Unless stated otherwise, dollar amounts are in millions.
Business context
Freshpet makes and sells fresh, refrigerated pet food and treats, primarily in the United States, through company-owned Freshpet Fridges placed in retail stores. At year-end, it had 15,015 fridge locations, up 12.2% from 2014, and estimated a potential North American footprint of at least 35,000 stores. Products introduced since 2011 generated 46% of 2015 net sales. The company operated one reportable segment.
Financial performance and liquidity
| Metric | 2015 | 2014 |
|---|---|---|
| Net sales | $116.2 | $86.8 |
| Gross profit / gross margin | $54.6 / 47.0% | $42.2 / 48.6% |
| SG&A | $58.3 | $48.3 |
| Operating loss | $(3.6) | $(6.1) |
| Net loss | $(3.7) | $(37.3) |
| Adjusted EBITDA (non-GAAP) | $11.1 | $5.5 |
| Cash from operating activities | $6.7 | $(8.0) |
| Cash and cash equivalents at year-end | $8.0 | $36.3 |
| Short-term investments at year-end | $3.3 | — |
| Total debt at year-end | — | — |
| Working capital at year-end | $16.2 | $41.2 |
Net sales rose 34%; excluding a $4.6 million Freshpet Baked product test, sales rose 29%. Sales growth reflected higher product velocity and expanded distribution. Gross margin declined 1.6 percentage points, with management citing new-product mix, manufacturing throughput constraints and start-up costs for new processes. SG&A fell to 50% of sales from 56%, helping reduce the operating loss. The net loss improvement also reflects the absence of 2014’s $25.9 million debt-guarantee charge and lower interest expense.
Adjusted EBITDA is a non-GAAP measure and excludes specified costs, including stock-based compensation and launch-related expenses; the company cautions it is not a substitute for GAAP results or a measure of cash available for investment. Capital expenditures were $32.2 million. Investing activities used $35.3 million, including plant expansion, fridge investment, an adjacent property purchase and net purchases of short-term investments.
The $40 million credit facilities were undrawn at year-end, and the company reported covenant compliance. Management expected cash, operating cash flow and borrowing capacity to fund foreseeable needs, while noting financing availability and cash generation were not assured.
Fourth-quarter results and material changes
2015 fourth-quarter net sales were $30.2 million, compared with $24.5 million in 2014’s fourth quarter. Gross margin was 45.3%, down from 48.9% a year earlier and down from 45.9% in 2015’s third quarter. Fourth-quarter 2015 reported net income of $2.8 million followed losses in the first three quarters; it included a $2.6 million reversal of stock-based compensation expense after performance-option vesting was no longer considered probable.
Compared with 2014, full-year sales increased 34%, operating loss narrowed, and operating cash flow turned positive. Cash and working capital fell substantially, mainly reflecting investment spending. Freshpet reported no year-end debt but planned to borrow approximately $8–$10 million from its facilities in the first half of 2016 to fund expansion, with repayment expected by the first quarter of fiscal 2017.
Outlook, risks and unusual items
- Expansion and growth: The company expected to spend approximately $30–$32 million on the Freshpet Kitchens expansion, with $17.6 million recorded in 2015 and the remaining spending expected in 2016. Management expected capacity to increase by at least 130% and anticipated completion during 2016. No specific revenue or earnings guidance is provided.
- Execution and capacity: Growth depends on successful plant expansion, accurate demand forecasts, fridge placements, product innovation and effective marketing. Delays or capacity shortfalls could constrain sales; excess capacity could weigh on margins.
- Concentration and supply chain: Ten customers collectively represented more than 69% of sales; the largest distributor represented 22%, and Target represented 11%. The company also relies on third parties for distribution and transportation, and co-packers are its sole source for treat products.
- Costs, safety and regulation: Ingredient, packaging, energy and freight costs may rise or supplies may be disrupted. Product-safety allegations, recalls, regulatory action or adverse publicity could damage the brand and results.
- Leadership change after year-end: On March 9, 2016, CEO Richard Thompson announced he would resign effective July 1, 2016 or earlier if a successor is appointed. The board appointed COO Scott Morris as president effective immediately. The company identified transition and replacement risks.
- Contingencies: Ordinary-course legal claims were reported, with no material pending proceeding identified. A vendor incentive potentially ranging from $250,000 to $850,000 was not accrued because management did not consider achievement of its performance goals probable.
- Other financial considerations: Federal and state net operating loss carryforwards were approximately $158.0 million and $128.6 million, respectively, but were subject to potential ownership-change limitations; a full valuation allowance was recorded against deferred tax assets.
Important facts for investors to verify
- Whether the plant expansion was completed on schedule and within the planned $30–$32 million budget, and whether it delivered the stated capacity increase.
- Subsequent borrowing, liquidity and cash-flow trends, including the expected 2016 facility draw and repayment plan.
- Whether sales growth and fridge productivity offset the 2015 decline in gross margin, and how much growth came from the Freshpet Baked test.
- The degree of customer, distributor, supplier and co-packer concentration, and any changes in those relationships.
- The CEO succession and transition, including any effects on operations or management retention.
- The basis for the fourth-quarter stock-compensation reversal and the ongoing comparability of non-GAAP Adjusted EBITDA.