Traeger, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Unaudited results are compared with the corresponding 2021 periods. Traeger designs, sources, sells and supports wood-pellet grills, consumables and accessories, including MEATER smart thermometers.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $93.8 million | $162.0 million | $517.8 million | $610.6 million |
| Gross profit | $26.0 million | $54.3 million | $183.0 million | $238.3 million |
| Gross margin | 27.7% | 33.5% | 35.4% | 39.0% |
| Net loss | $210.6 million | $89.2 million | $351.4 million | $55.2 million |
| Operating cash flow | Not separately presented for the quarter | $(6.0) million | $(0.9) million |
Q3 basic and diluted loss per share was $1.76, versus $0.78 a year earlier; nine-month loss per share was $2.96, versus $0.50. Q3 revenue fell 42.1% year over year, principally due to lower grill volumes. Grills revenue declined 64.2%; consumables fell 10.3%; accessories grew 17.7%, helped by MEATER. For the nine months, grills fell 30.8%, consumables 2.9%, and accessories rose 81.9%.
Q3 gross margin declined 5.8 percentage points, with higher logistics and warehousing costs, promotional discounts to reduce inventory, and restructuring costs among the drivers; higher selling prices partly offset the decline. Nine-month margin fell 3.6 percentage points, reflecting product mix, shipping costs, lower MEATER margins and restructuring costs, partly offset by higher selling prices. Q3 retail revenue was $68.1 million and direct-to-consumer revenue was $25.7 million.
Operating results included non-cash goodwill impairment of $110.8 million in Q3 and $222.3 million year to date. Q3 also included $8.0 million of restructuring expense; total restructuring-related costs, including $1.6 million of inventory write-offs and contract cancellations recorded in cost of revenue, were $9.6 million. Equity-based compensation was $53.3 million in Q3, including approximately $39.4 million related to accelerated vesting under the CEO’s award modification.
Balance sheet, debt and liquidity
- At September 30, 2022, cash and cash equivalents were $8.3 million, down from $16.7 million at December 31, 2021. Current assets were $233.8 million and current liabilities $109.8 million.
- Inventory was $161.8 million, up from $145.0 million at year-end 2021. Accounts receivable, net, was $34.4 million, down from $92.9 million.
- Notes payable were $430.9 million on the balance sheet; the company reported $391.7 million of principal outstanding on its first-lien term loan, $47.0 million drawn on its revolving facility, and $13.5 million drawn under its receivables facility. These facility disclosures and balance-sheet classifications should not be assumed to reconcile directly.
- Nine-month investing cash outflow was $15.5 million, mainly property, plant and equipment purchases. Financing provided $13.1 million; cash decreased by $8.4 million over the period.
- Management reported $78.0 million of revolver availability and no receivables-facility borrowing capacity at quarter-end, and said existing cash, facility availability and expected operating cash flows should cover requirements for at least 12 months. This is management’s assessment, not a quantified forecast.
Material developments, outlook and risks
- Management attributed weaker demand to macroeconomic pressure, including inflation, consumer-demand slowdown and supply-chain constraints. Higher component and freight costs affected cost of revenue. The company expected these trends to continue through Q4 2022, with lower revenue and margins than the comparable prior-year quarter; no numeric guidance was provided.
- The July 2022 restructuring eliminated approximately 14% of global headcount, suspended Traeger Provisions, and postponed plans to manufacture in Mexico. These actions were substantially completed in Q3.
- Following sustained share-price and market-capitalization declines and lower-than-expected results, Traeger recorded goodwill impairment. Goodwill remained $74.7 million at quarter-end; further impairment charges could adversely affect results.
- The August amendment to the first-lien credit agreement raised the springing leverage covenant limit from 6.20:1.00 to 8.50:1.00 during the covenant amendment period, through the earlier of June 30, 2023 or an earlier company election. It also added a $35 million minimum-liquidity covenant, tested only when the company requests revolver borrowings. Traeger reported compliance with these amended covenants at quarter-end.
- Traeger was not in compliance with a minimum-dilution-ratio covenant under its receivables financing agreement at September 30. The filing says this did not accelerate or increase a direct financial obligation. On November 8, 2022, the company obtained a waiver and amended the agreement.
- The term loan bears floating-rate exposure; a $379.2 million interest-rate swap fixes the rate component at 2.08% through February 2026. The swap had a $24.6 million net asset value at quarter-end. Foreign-currency contracts produced losses, and interest expense was $7.3 million in Q3.
- Customer concentration and reliance on a limited number of third-party manufacturers remain risks. Four large retail customers represented substantial portions of sales and receivables. The filing reports no pending legal matter expected to have a material adverse effect and says disclosure controls were effective at the reasonable-assurance level.
Important facts for investors to verify
- Whether demand, grill volumes, promotional activity and gross margins stabilized after Q3, particularly against management’s stated Q4 expectations.
- Available liquidity and borrowing capacity, including compliance with the receivables-facility terms and the conditions attached to the $35 million minimum-liquidity covenant.
- Debt balances, floating-rate exposure, interest costs and compliance with credit covenants as subsequent results become available.
- The assumptions underlying the goodwill valuation and whether further impairment is required.
- Restructuring savings and remaining costs, as well as the ongoing impact of accelerated equity compensation and other stock-based awards.
- The November 10, 2022 amendment extending the Apption Labs earn-out period through 2023 and revising its performance measures; remaining earn-out amounts could be material.