Traeger, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Traeger designs and sells wood-pellet grills, pellets, consumables, accessories and MEATER products through retail and direct-to-consumer channels. Financial amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Revenue | $153.2 million | $223.7 million |
| Gross profit / margin | $55.4 million / 36.2% | $82.6 million / 36.9% |
| Operating loss | $3.3 million | $3.5 million |
| Net income (loss) | $8.0 million | ($9.0 million) |
| Net cash used in operating activities | $23.6 million | $46.9 million |
| Cash, cash equivalents and restricted cash at quarter-end | $27.7 million | $11.1 million |
- Revenue fell 31.5% year over year. Grill sales decreased 40.3% to $89.7 million; consumables fell 24.2% to $30.0 million; accessories were nearly flat at $33.4 million.
- Retail revenue was $132.6 million, versus $203.2 million; direct-to-consumer revenue was $20.6 million, essentially unchanged. North America revenue was $138.9 million, down from $207.3 million.
- Gross margin declined 0.7 percentage points, attributed to promotional investment timing and higher product costs, partly offset by lower domestic logistics costs and favorable foreign exchange.
- Operating expenses declined 31.9% to $58.7 million, including lower sales and marketing and general and administrative costs. Stock-based compensation expense was $7.9 million, compared with $15.5 million.
- Net income included a material, largely noncash benefit from the interest-rate swap: $21.9 million of other income, including a $23.4 million reclassification to income after hedge accounting was discontinued. Interest expense rose to $10.5 million from $5.8 million. Net income therefore should not be read as evidence of improved operating profitability.
- Operating cash outflow improved year over year but remained substantial. A $57.1 million increase in accounts receivable was the principal working-capital use; inventory declined $21.1 million.
- At March 31, cash and cash equivalents were $15.2 million, with another $12.5 million restricted. The company reported $82.5 million of revolver availability and $0.1 million of receivables-facility availability. It had drawn $42.5 million on the revolver and $40.9 million under receivables financing.
- First-lien term-loan principal was $404.0 million. Notes payable, net of current portion, were $438.9 million; the reported carrying amount of total credit-facility debt was $446.5 million. The revolving facility expires in 2026 and the term loan matures in 2028.
Material changes and unusual items
- Sales declines were primarily volume-driven; higher selling prices partly offset lower grill volume. Management cited continued consumer-demand weakness and inflationary pressure.
- The interest-rate swap ceased qualifying for hedge accounting after the term loan’s interest-reset period changed. Traeger recognized the accumulated $23.4 million gain in Q1 other income; the swap’s net asset fair value was $19.0 million at quarter-end.
- The company’s covenant amendment period was scheduled to run through June 30, 2023 unless ended earlier. During it, the springing leverage covenant was increased to 8.50:1.00 and a $35 million minimum-liquidity covenant applied when the company requested revolver borrowings. Traeger reported compliance as of March 31, 2023.
- In April, Traeger paid $12.4 million of contingent consideration using restricted cash. The remaining undiscounted potential payment was $15.0 million, due in the first half of 2024.
- After quarter-end, on April 13, the company cancelled unearned executive performance stock units and granted the CEO 1,037,728 performance-based restricted shares. Traeger expects approximately $27.5 million of stock-based compensation expense in Q2 related to the cancellations.
Outlook, risks and contingencies
- No specific quarterly or full-year revenue or earnings guidance is provided in the filing. Management expects sales and marketing expense to decrease in the short term and says it expects available cash, financing capacity and anticipated operating cash flows to cover working-capital and operating needs for at least the next 12 months.
- Management warned that ongoing macroeconomic weakness, inflation, slower consumer demand and supply-chain constraints could reduce revenue and margins, raise component and freight costs, and hinder order fulfillment.
- Other key exposures include dependence on three large U.S. retail customers, a limited number of third-party manufacturers and suppliers, variable-rate debt, and potential difficulty accessing uninsured bank deposits. The three largest customers accounted for 51% of Q1 sales in aggregate.
- The company reported no pending legal matter expected to have a material adverse effect and no material changes to the risk factors in its 2022 Form 10-K. It stated that disclosure controls were effective at the reasonable-assurance level and that there were no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether sales volumes and consumer demand stabilize, particularly for grills and consumables, and whether gross margin recovers.
- Whether operating cash flow improves as receivables convert to cash; monitor cash, restricted cash, and the very limited reported availability under receivables financing.
- Debt-service capacity, covenant compliance after the amendment period, and the effect of interest rates on interest expense.
- The timing and accounting impact of the April contingent-consideration payment and expected Q2 stock-compensation charge.
- Whether the interest-rate swap gains and other non-operating items obscure underlying operating trends in reported net income.