Freshpet, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. The interim financial statements are unaudited. Freshpet manufactures and markets fresh pet food; sales are primarily through refrigerated displays in retail stores.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $41.2 million | $34.5 million | $115.7 million | $99.0 million |
| Gross profit / margin | $19.5 million / 47.3% | $15.4 million / 44.4% | $53.5 million / 46.2% | $45.2 million / 45.6% |
| SG&A | $19.3 million | $14.5 million | $57.8 million | $48.9 million |
| Operating income (loss) | $0.2 million | $0.8 million | $(4.4) million | $(3.8) million |
| Net income (loss) | $(0.2) million | $0.6 million | $(5.8) million | $(4.4) million |
| Adjusted EBITDA (non-GAAP) | $5.6 million | $5.3 million | $10.7 million | $11.3 million |
Q3 sales grew 19%; nine-month sales grew 17%. Refrigerated-channel growth drove results, while Freshpet Baked sales declined. Q3 gross margin improved 290 basis points, attributed mainly to cost savings and scale, partly offset by depreciation from the Kitchens expansion. SG&A rose faster than sales in Q3, driven by higher media spending, volume-related freight, staffing and other operating costs, and leadership-transition expenses. Nine-month SG&A increased 18%, and operating and net losses widened.
Operating cash flow for the first nine months was $5.1 million, down from $7.3 million. Investing used $10.8 million, principally for Kitchens, refrigerators and other capital expenditures; financing provided $3.9 million. Cash declined to $2.1 million from $3.9 million at year-end 2016. At September 30, debt was $5.5 million, with $24.5 million available under the new revolving facility. Total assets were $132.1 million and stockholders’ equity was $111.5 million.
Changes, outlook and risks
- Freshpet amended its credit agreement in September, replacing prior facilities with a $30 million revolving facility, expandable by $10 million, maturing in September 2020. Management reported covenant compliance and said it expected to fund operations and obligations through cash, operating cash flow and available borrowing capacity; it expected to reduce facility usage. This is not formal earnings guidance.
- Freshpet Fridge locations reached 17,650, up 8.5% year over year. Management cited store penetration, sales velocity and consumer interest in pet health as growth drivers, and expects increased capacity utilization to support margins over time. It also said higher marketing investment may keep SG&A as a share of sales elevated in the near term.
- Liquidity depends on achieving revenue and cash-flow expectations and managing costs and working capital. The company cautioned that financing may be needed if performance falls short or expansion requires more capital. Variable-rate debt, commodity-price volatility and pound sterling movements are disclosed exposures.
- A securities lawsuit against the company and certain officers and directors remains pending. Freshpet disputes the allegations; it said the litigation was at an early stage and it could not estimate a possible loss range. Ordinary-course claims were also disclosed.
- Freshpet expected adoption of the new revenue standard in 2018 to accelerate recognition of trade promotions and customer incentives, but did not expect a material impact. It was assessing the balance-sheet impact of the new lease standard.
Key facts for investors to verify
- Whether sales growth and refrigerated-channel momentum continue, and whether declining Baked sales persist.
- Whether gross-margin gains can offset marketing, freight, staffing and expansion-related costs.
- Whether operating cash flow covers planned capital spending and working-capital needs, particularly as receivables and inventory grow.
- Facility usage, variable interest costs, covenant compliance and the availability of additional financing.
- Potential financial exposure from the securities lawsuit and the eventual effects of new revenue and lease accounting rules.