Freshpet(FRPT) - 2024 Q1 - Quarterly Report

Part I. Financial Information Item 1. Financial Statements (Unaudited) The unaudited Q1 2024 financial statements reflect a significant turnaround with net income of $18.6 million, driven by a 33.6% increase in net sales to $223.8 million and positive operating cash flow Condensed Consolidated Balance Sheets As of March 31, 2024, total assets increased to $1.48 billion, total liabilities slightly decreased to $502.7 million, and stockholders' equity grew to $977.8 million Balance Sheet Items | Balance Sheet Items | March 31, 2024 (in thousands) | December 31, 2023 (in thousands) | | :--- | :--- | :--- | | Total Assets | $1,480,590 | $1,464,421 | | Total Current Assets | $406,958 | $427,319 | | Property, plant and equipment, net | $1,005,759 | $979,164 | | Total Liabilities | $502,746 | $510,967 | | Total Current Liabilities | $81,946 | $89,222 | | Convertible senior notes | $393,588 | $393,074 | | Total Stockholders' Equity | $977,844 | $953,454 | Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) Q1 2024 operations show a significant turnaround to net income of $18.6 million from a prior-year loss, driven by a 33.6% increase in net sales to $223.8 million and improved gross profit Metric | Metric | Q1 2024 (in thousands) | Q1 2023 (in thousands) | Change | | :--- | :--- | :--- | :--- | | Net Sales | $223,849 | $167,522 | +33.6% | | Gross Profit | $88,158 | $50,760 | +73.7% | | Income (Loss) from Operations | $8,463 | $(21,511) | Turnaround | | Gain on Equity Investment | $9,918 | $0 | N/A | | Net Income (Loss) | $18,602 | $(24,786) | Turnaround | | Diluted EPS | $0.37 | $(0.52) | Turnaround | Condensed Consolidated Statements of Cash Flows Net cash provided by operating activities significantly improved to $5.4 million in Q1 2024, while investing activities used $46.5 million, ending the period with $257.9 million in cash Cash Flow Activity | Cash Flow Activity | Q1 2024 (in thousands) | Q1 2023 (in thousands) | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $5,406 | $(13,740) | | Net cash used in investing activities | $(46,473) | $(107,365) | | Net cash provided by financing activities | $2,090 | $325,513 | | Net Change in Cash | $(38,977) | $204,408 | | Cash at end of period | $257,894 | $337,143 | - The significant cash provided by financing activities in Q1 2023 was due to the issuance of $393.5 million in convertible senior notes[21] Notes to Condensed Consolidated Financial Statements Key notes include a $9.9 million gain on an equity investment, the issuance of $402.5 million in convertible senior notes in March 2023, and details on a legal dispute with a former distributor - The company recognized a $9.9 million gain on an equity investment after the investee completed an equity funding round, allowing for a fair value adjustment under ASC 321[32] - In March 2023, the company issued $402.5 million of 3.0% convertible senior notes due 2028, with an initial conversion price of approximately $69.68 per share[59][62] - The company is in a legal dispute with former distributor Phillips Feed Service, Inc. over an alleged breach of contract, with a non-jury trial scheduled for September 16, 2024, though management does not expect a material adverse effect[89][91][92] Net Sales by Channel | Net Sales by Channel | Q1 2024 (in thousands) | Q1 2023 (in thousands) | | :--- | :--- | :--- | | Grocery, Mass, International and Digital | $184,429 | $140,179 | | Pet Specialty and Club | $39,420 | $27,343 | | Total Net Sales | $223,849 | $167,522 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes strong Q1 2024 performance to a 33.6% net sales increase, improved gross margin to 39.4%, and positive income from operations, with plans for significant capital expenditures Results of Operations Q1 2024 results show net sales growth of 33.6%, gross profit margin expansion to 39.4%, and a turnaround to $18.6 million net income from a prior-year loss Metric | Metric | Q1 2024 | Q1 2023 | | :--- | :--- | :--- | | Net Sales | $223.8M | $167.5M | | % Change | +33.6% | - | | Volume Growth | +30.6% | - | | Gross Profit | $88.2M | $50.8M | | Gross Margin | 39.4% | 30.3% | | SG&A as % of Sales | 35.6% | 43.1% | | Income (Loss) from Operations | $8.5M | $(21.5)M | | Net Income (Loss) | $18.6M | $(24.8)M | - The increase in gross profit margin was primarily due to improved leverage on plant expenses, reduced quality costs, and lower input costs as a percentage of sales[111] - The decrease in SG&A as a percentage of net sales was mainly a result of reduced logistics costs and media spend as a percentage of net sales, in addition to lower share-based compensation[113] Non-GAAP Financial Measures Non-GAAP measures highlight strong Q1 2024 performance, with Adjusted EBITDA surging to $30.6 million and Adjusted Gross Profit reaching $101.5 million Reconciliation of Net Income (Loss) to Adjusted EBITDA | Line Item | Q1 2024 (in thousands) | Q1 2023 (in thousands) | | :--- | :--- | :--- | | Net income (loss) | $18,602 | $(24,786) | | Depreciation and amortization | $15,745 | $14,492 | | Interest income, net of interest expense | $(275) | $2,225 | | Income tax expense | $54 | $70 | | EBITDA | $34,126 | $(7,999) | | Gain on equity investment | $(9,918) | - | | Non-cash share-based compensation | $6,221 | $8,415 | | Other adjustments | $150 | $1,571 | | Adjusted EBITDA | $30,579 | $2,967 | Reconciliation of Gross Profit to Adjusted Gross Profit | Line Item | Q1 2024 (in thousands) | Q1 2023 (in thousands) | | :--- | :--- | :--- | | Gross profit | $88,158 | $50,760 | | Depreciation expense | $10,675 | $10,721 | | Non-cash share-based compensation | $2,622 | $2,956 | | Adjusted Gross Profit | $101,476 | $64,437 | | Adjusted Gross Margin | 45.3% | 38.5% | Liquidity and Capital Resources As of March 31, 2024, the company maintained $257.9 million in cash and $325.0 million in working capital, with significant capital expenditures planned for facility expansion - The company spent approximately $46.5 million on capital expenditures in Q1 2024 and expects to spend an additional $163.5 million in the remainder of fiscal 2024, mainly for the expansion of Freshpet Kitchens Ennis[135] - Working capital decreased by $13.1 million from year-end 2023 to $325.0 million, primarily due to a $39.0 million decrease in cash and a $10.5 million increase in accounts payable, partially offset by a $17.6 million decrease in accrued expenses[140] - In March 2023, the company issued $402.5 million in convertible notes and terminated its previous Credit Agreement to meet its capital needs[134] Item 3. Quantitative and Qualitative Disclosures about Market Risk The company faces market risks including interest rate fluctuations, commodity price volatility, and foreign exchange risk, with European revenue representing only 1% of the total - The company is subject to interest rate risk, which can affect borrowing costs and investment values[155] - The company faces commodity price volatility for its inputs, which it attempts to manage through pricing actions and cost controls[156] - Foreign exchange risk exists from operations in Europe (British pound and Euro), but the impact is limited as European revenue constituted only 1% of the total in Q1 2024[157] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of March 31, 2024, with no material changes to internal control over financial reporting during the quarter - Based on an evaluation as of the end of the reporting period, the Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective[160] - No changes in internal control over financial reporting occurred during the quarter that materially affected, or are reasonably likely to materially affect, these controls[161] Part II. Other Information Item 1. Legal Proceedings The company is involved in ordinary course legal proceedings, none of which are expected to have a material adverse effect on its financial condition or operations - The company is involved in ordinary course legal actions but does not expect them to have a material adverse effect on its business[165] Item 1A. Risk Factors No material changes to the risk factors previously disclosed in the Annual Report on Form 10-K have occurred - No material changes to the risk factors reported in the Annual Report have occurred[166] Item 5. Other Information No directors or officers reported the adoption or termination of Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during the quarter - No directors or officers reported the adoption or termination of any Rule 10b5-1 trading plans during the first quarter of 2024[169] Item 6. Exhibits This section lists exhibits filed with the Form 10-Q, including CEO and CFO certifications and Inline XBRL documents - The report includes required certifications from the CEO and CFO under Sections 302 and 906 of the Sarbanes-Oxley Act, as well as XBRL data files[171]