Traeger, Inc. (COOK) FY 2022 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion and analysis of our financial condition and results of operations together with our audited consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements based upon current plans, expectations and beliefs involving risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under "Risk Factors" and in other parts of this Annual Report on Form 10-K. A discussion of the year ended December 31, 2021 compared to the year ended December 31, 2020 has been reported previously in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed with the SEC on March 29, 2022, under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations."
Overview
Traeger is the creator and category leader of the wood pellet grill, an outdoor cooking system that ignites all-natural hardwoods to grill, smoke, bake, roast, braise, and barbecue. Our grills are versatile and easy to use, empowering cooks of all skill sets to create delicious meals with a wood-fired flavor that cannot be replicated with gas, charcoal, or electric grills. Grills are at the core of our platform and are complemented by Traeger wood pellets, rubs, sauces, and accessories.
Our marketing strategy has been instrumental in building our brand and driving customer advocacy and revenue. We have disrupted the outdoor cooking market and created a passionate community, the Traegerhood, which includes foodies, pitmasters, backyard heroes, moms and dads, professional athletes, outdoorsmen and outdoorswomen, and world-class chefs. This community, together with our various marketing initiatives, has helped to promote our brand and products to the wider consumer population and supported our efforts to redefine outdoor cooking as an experience accessible to everyone. We have an active online and social media presence and a content-rich website that drives significant customer engagement and brings our Traegerhood together. We also directly engage with our current and target customers by sponsoring and participating in a variety of events, including live shows, outdoor festivals, rodeos, music and film festivals, barbecue competitions, fishing tournaments, and retailer events. We believe the style and authenticity of our customer engagement reinforces our brand and drives new and existing customer interest in our products and community.
Our revenue is primarily generated through the sale of our wood pellet grills, consumables and accessories. We currently offer six series of grills – Pro (with and without WiFIRE), Ironwood and Timberline – as well as a selection of smaller, portable grills within our Town and Travel Series and a special Club Lineup through targeted channels. Our grills are available in a number of different sizes and can be upgraded through a variety of accessories. A growing number of our grills feature WiFIRE technology, which allows users to monitor and adjust their grills remotely using our Traeger app. Our consumables include our wood pellets, which are made from natural, virgin hardwood and are available in a variety of flavors, as well as rubs and sauces. Our accessories include grill covers, liners, tools, MEATER smart thermometers, apparel and other ancillary items.
We sell our grills using an omnichannel distribution strategy that consists primarily of retail and direct to consumer ("DTC") channels. Our retail channel covers brick-and-mortar retailers, e-commerce platforms, and multichannel retailers, who, in turn, sell our grills to their end customers. Our retailers include Ace Hardware, Amazon, Costco, The Home Depot, and Best Buy, among others, as well as a significant number of independent retailers that cater to local communities and specific categories, such as hardware, camping, outdoor, farm, ranch, barbecue and other categories. Our DTC channel covers sales directly to customers through our website and Traeger app, as well as certain country- and region-specific Traeger or distributor websites. Our consumables and accessories are available through the same channels as our grills.
Over the last several years, we have made significant investments in our supply chain and manufacturing operations. Our supply chain includes third party manufacturers for our grills and accessories and pellet production facilities for our wood pellets that we own or lease. We work closely with our manufacturers to evolve on design, manufacturing process and product quality. Our grills are currently manufactured in China and Vietnam, our wood pellets are produced at facilities located in New York, Oregon, Georgia, Virginia, and Texas, and our MEATER smart thermometer accessories are currently manufactured in Hong Kong. We have entered into manufacturing agreements covering the supply of substantially all of our grills and accessories, pursuant to which we make purchases on a purchase order basis. We rely on several third-party suppliers for the components used in our grills, including integrated circuits, processors, and system on chips.
Our revenue decreased by 16.5% for the year ended December 31, 2022 as compared to the year ended December 31, 2021, and was $655.9 million for the year ended December 31, 2022, down from $785.5 million for the year ended December 31, 2021. We recorded a net loss of $382.1 million for the year ended December 31, 2022, compared to a net loss of $91.8 million for the year ended December 31, 2021.
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Key Factors Affecting Our Financial Condition and Results of Operation
We believe that our financial condition and results of operations have been, and will continue to be, affected by a number of factors that present significant opportunities for us but also pose risks and challenges, including those below and in Part I, Item 1A. "Risk Factors" of this Annual Report on Form 10-K.
Macroeconomic Conditions
Continuing global economic uncertainty, political conditions and fiscal challenges in the U.S. and abroad could result in adverse macroeconomic conditions, including inflation, slower growth or recession. In particular, in the fourth quarter of 2022, we continued to experience inflationary pressure, and a slowdown in consumer demand. These challenging macroeconomic pressures have resulted in a decline in our revenue in the year ended 2022 compared to the prior year period. If these macroeconomic trends continue through the first quarter of 2023, we could experience lower revenue and margins as compared to the corresponding prior year period.
Supply chain constraints have led to higher product component and freight costs, which have increased our cost of revenues. If these macroeconomic uncertainties or supply chain challenges persist or worsen in the future, we may observe reduced customer demand for our offerings, increased competition for critical components, challenges fulfilling certain customer orders or continued increases in component and freight costs which could impact our operating results, including our ability to achieve historical levels of revenue.
Components of Results of Operations
Revenue
We derive substantially all of our revenue from the sale of grills, consumables and accessories in North America, which includes the United States and Canada. We recognize revenue, net of product returns, for our grills, consumables and accessories generally at the time of delivery to retailers through our retail channel and to customers through our DTC channel. Estimated product returns are recorded as a reduction of revenue at the time of recognition and are calculated based on product returns history, observable changes in return behavior, and expected returns based on sales volume and mix. We also have certain contractual programs that can give rise to elements of variable consideration, such as volume incentive rebates, with estimated amounts of credits recorded as a reduction to revenue.
Although we experience demand for our products throughout the year, we believe there can be certain seasonal fluctuations in our revenue. We have typically experienced moderately higher levels of sales of our grills in the first and second quarters of the year as our retailers purchase inventory in advance of warmer weather, when demand for outdoor cooking products is the highest across our key markets. Higher sales also coincide with social events and national holidays, which occur during the same warm weather timeframe.
Gross Profit
Gross profit reflects revenue less cost of revenue. Cost of revenue consists of product costs, including the costs of components, costs of products from our third-party manufacturers, direct and indirect manufacturing costs across all products, packaging, inbound freight and duties, warehousing and fulfillment, warranty costs, product quality testing and inspection costs, excess and obsolete inventory write-downs, cloud-hosting costs for our WiFIRE connected grills, depreciation of tooling and manufacturing equipment, amortization of internal use software and patented technology, and certain employee-related expenses.
We calculate gross margin as gross profit divided by revenue. Gross margin can be impacted by several factors, including, in particular, product mix and sales channel mix. For example, gross margin on sales through our DTC channel is generally higher than gross margin on sales through our retail channel. If our DTC sales grow faster than sales from our retail channel, and if we are able to realize greater economies of scale or product cost improvements through engineering and sourcing, we would expect a favorable impact to overall gross margin over time. Additionally, gross margin on sales of certain of our products is higher than for others. If revenue from sales of wood pellets increased as a percentage of total revenue, we would expect to see an increase in overall gross margin. These favorable anticipated gross margin impacts may not be realized, or may be offset by other unfavorable gross margin factors. Additionally, any new products that we develop, or our planned expansion into new geographies, may impact our future gross margin. External factors beyond our control, such as duties and tariffs and costs of doing business in certain geographies can also impact gross margin.
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Sales and Marketing
Sales and marketing expense consists primarily of the costs associated with advertising and marketing of our products and employee-related expenses, including salaries, benefits, and equity-based compensation expense, as well as sales incentives and professional services. These costs can include print, internet and television advertising, travel-related expenses, direct customer acquisition costs, costs related to conferences and events, and broker commissions. We expect our sales and marketing expense to decrease in the short-term as we continue to reduce our costs to drive long-term operational efficiencies. We expect our sales and marketing expense to increase on an absolute dollar basis in the long-term as we continue to increase the scope of outreach to potential new customers to drive our revenue growth. We also anticipate that sales and marketing expense as a percentage of revenue will fluctuate from period to period based on revenue for such period and the timing of the expansion of our sales and marketing functions, as these activities may vary in scope and scale over future periods.
General and Administrative
General and administrative expense consists primarily of employee-related expenses and facilities for our executive, finance, accounting, legal, human resources, information technology and other administrative functions. General and administrative expense also includes fees for professional services, such as external legal, accounting, and information and technology services, and insurance.
In addition, general and administrative expense includes research and development expenses incurred to develop and improve our future products and processes, which primarily consist of employee and facilities-related expenses, including salaries, benefits and equity-based compensation expense, as well as fees for professional services, costs related to prototype tooling and materials, and software platform costs. Research and development expense was $10.8 million, $18.8 million and $6.8 million for the year ended December 31, 2022, 2021 and 2020, respectively.
As a result of the 2022 restructuring plan (as described below), we expect general and administrative expense, including our research and development expenses and external legal and accounting expenses, to normalize as we continue to manage our investments to support our growth and develop new and enhance existing products. We anticipate that general and administrative expense as a percentage of revenue will vary from period to period, but we expect to leverage these expenses over time as we grow our revenue.
Amortization of Intangible Assets
Amortization of intangible assets primarily consists of amortization of identified finite-lived customer relationships, distributor relationships, non-compete arrangements and trademark assets that were allocated a considerable portion of the purchase price from the corporate reorganization and acquisition of our business in 2017, as well as the July 2021 acquisition of Apption Labs. These costs are amortized on a straight-line basis over 2.5 to 25 year useful lives and, as a result, amortization expense on these assets is expected to remain stable over the coming years. Future business acquisitions may result in incremental amortization of intangible assets acquired in any such transactions.
Change in Fair Value of Contingent Consideration
The fair values of our contingent consideration earn out obligation associated with the Apption Labs business combination is estimated based on probability adjusted present values of the consideration expected to be transferred using significant inputs. At each reporting date, we revalue the contingent consideration obligation to its fair value and records increases and decreases in fair value in the general and administrative expenses in our consolidated statements of operations and comprehensive income (loss). Changes in the fair value of the contingent consideration obligation results from changes in discount periods and rates, and changes in probability assumptions with respect to the likelihood of achieving the performance targets.
Goodwill Impairment
Goodwill represents the excess of consideration transferred over the fair value of tangible and identifiable intangible net assets acquired and the liabilities assumed in a business combination. Substantially all of our goodwill was recognized in the purchase price allocations when our Company was acquired in 2017 and when Apption Labs was acquired in July 2021, with smaller incremental amounts recognized in subsequent business combinations. Goodwill is not amortized, but is tested for impairment at the reporting unit level annually or more frequently if events or changes in circumstances indicate that it is more likely than not that the fair value of the reporting unit is less than its carrying amount. In conducting the impairment test, we first review qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than
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its carrying amount. We currently operate as a single reporting unit under the guidance in Topic 350, Intangibles - Goodwill and Other.
When testing goodwill for impairment, we have the option of first performing a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. If we elect to bypass the qualitative assessment, or if a qualitative assessment indicates it is more likely than not that carrying value exceeds its fair value, we perform a quantitative goodwill impairment test. Under the quantitative goodwill impairment test, if our reporting unit’s carrying amount exceeds its fair value, we will record an impairment charge based on that difference. The Company performed interim goodwill impairment tests during the second and third quarters of 2022 and concluded that the carrying value of the single reporting unit exceeded its fair value and recorded a $222.3 million non-cash goodwill impairment charge for the year ended December 31, 2022.
Restructuring Costs
The Board approved the 2022 restructuring plan as part of its efforts to reduce our costs and drive long-term operational efficiencies due to challenging macroeconomic pressures. As part of the 2022 restructuring plan, we eliminated approximately 14% of our global headcount, suspended operations of Traeger Provisions, our premium frozen meal kit business, and postponed nearshoring efforts to manufacture product in Mexico. These actions were substantially completed in the third quarter of fiscal 2022.
Total Other Expense
Total other expense consists of interest expense and other income (expense). Interest expense includes interest and other fees associated with our Credit Facilities and Receivables Financing Agreement (each as defined below), and settlements from our interest rate swap agreement. Other income (expense) also consists of any gains (losses) on the sale of long-lived assets, foreign currency realized and unrealized gains and losses resulting from exchange rate fluctuations on transactions denominated in a currency other than the U.S. Dollar, and from the foreign currency contracts that we use to manage our exposure to foreign currency exchange rate risk related to our purchases and international operations.
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Results of Operations
The following tables summarize key components of our results of operations for the periods presented. The period-to-period comparisons of our historical results are not necessarily indicative of the results that may be expected in the future.
| Year-ended December 31, | Change | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | Amount | % | |||||||||||
| (dollars in thousands) | ||||||||||||||
| Revenue | $ | 655,901 | $ | 785,545 | $ | (129,644) | (16.5) | % | ||||||
| Cost of revenue | 427,129 | 484,780 | (57,651) | (11.9) | % | |||||||||
| Gross profit | 228,772 | 300,765 | (71,993) | (23.9) | % | |||||||||
| Operating expense: | ||||||||||||||
| Sales and marketing | 130,688 | 165,180 | (34,492) | (20.9) | % | |||||||||
| General and administrative | 166,824 | 158,555 | 8,269 | 5.2 | % | |||||||||
| Amortization of intangible assets | 35,554 | 34,379 | 1,175 | 3.4 | % | |||||||||
| Change in fair value of contingent consideration | 10,002 | 3,800 | 6,202 | 163.2 | % | |||||||||
| Goodwill impairment | 222,322 | — | 222,322 | 100.0 | % | |||||||||
| Restructuring costs | 9,324 | — | 9,324 | 100.0 | % | |||||||||
| Total operating expense | 574,714 | 361,914 | 212,800 | (58.8) | % | |||||||||
| Loss from operations | (345,942) | (61,149) | 284,793 | 465.7 | % | |||||||||
| Other income (expense): | ||||||||||||||
| Interest expense | (27,885) | (26,646) | (1,239) | 4.6 | % | |||||||||
| Loss on extinguishment of debt | — | (5,185) | (5,185) | (100.0) | % | |||||||||
| Other income (expense) | (7,127) | 2,702 | (9,829) | (363.8) | % | |||||||||
| Total other expense | (35,012) | (29,129) | (5,883) | 20.2 | % | |||||||||
| Loss before provision for income taxes | (380,954) | (90,278) | (290,676) | 322.0 | % | |||||||||
| Provision for income taxes | 1,186 | 1,489 | (303) | (20.3) | % | |||||||||
| Net loss | $ | (382,140) | $ | (91,767) | $ | (290,373) | 316.4 | % |
Comparison of the Year Ended December 31, 2022 and 2021
Revenue
| Year-ended December 31, | Change | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | Amount | % | |||||||||||
| (dollars in thousands) | ||||||||||||||
| Revenue: | ||||||||||||||
| Grills | $ | 355,441 | $ | 544,200 | $ | (188,759) | (34.7) | % | ||||||
| Consumables | 131,342 | 136,216 | (4,874) | (3.6) | % | |||||||||
| Accessories | 169,118 | 105,129 | 63,989 | 60.9 | % | |||||||||
| Total Revenue | $ | 655,901 | $ | 785,545 | $ | (129,644) | (16.5) | % |
Revenue decreased by $129.6 million, or 16.5%, to $655.9 million for the year ended December 31, 2022 compared to $785.5 million for the year ended December 31, 2021. This decrease was driven primarily by lower unit volume for grills and consumables, partially offset by higher selling prices for grills. Accessories revenue benefited from incremental revenue in the first half of 2022 due to sales of MEATER smart thermometers following the July 2021 acquisition of Apption Labs.
Revenue from our grills decreased by $188.8 million, or 34.7%, to $355.4 million for the year ended December 31, 2022 compared to $544.2 million for the year ended December 31, 2021. The decrease was driven primarily by lower unit volume, partially offset by a higher average selling price resulting from the introduction of higher price products, price increases taken in September 2021 and early 2022, and channel mix shift.
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Revenue from our consumables decreased by $4.9 million, or 3.6%, to $131.3 million for the year ended December 31, 2022 compared to $136.2 million for the year ended December 31, 2021. The decrease was driven primarily by lower unit volume of wood pellets partially offset by increased volume on food consumables and higher average selling prices of wood pellets and other consumables.
Revenue from our accessories increased by $64.0 million, or 60.9%, to $169.1 million for the year ended December 31, 2022 compared to $105.1 million for the year ended December 31, 2021. This increase was driven primarily by incremental revenue in the first half of 2022 due to sales of MEATER smart thermometers following the July 2021 acquisition of Apption Labs combined with increased volume of Meater products in the second half of 2022 compared to the second half of 2021.
Gross Profit
| Year-ended December 31, | Change | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | Amount | % | |||||||||||
| (dollars in thousands) | ||||||||||||||
| Gross profit | $ | 228,772 | $ | 300,765 | $ | (71,993) | (23.9) | % | ||||||
| Gross margin (Gross profit as a percentage of revenue) | 34.9 | % | 38.3 | % |
Gross profit decreased by $72.0 million, or 23.9%, to $228.8 million for the year ended December 31, 2022 compared to $300.8 million for the year ended December 31, 2021. Gross profit as a percentage of revenue decreased to 34.9% for the year ended December 31, 2022 from 38.3% for the year ended December 31, 2021. The decrease in gross margin was driven primarily by decreased leverage on fixed costs and expenses, restructuring costs, and limited discounting. The decrease was partially offset by higher selling prices of grills and accessories as well as favorability in foreign exchange rates.
Sales and Marketing
| Year-ended December 31, | Change | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | Amount | % | |||||||||||
| (dollars in thousands) | ||||||||||||||
| Sales and marketing | $ | 130,688 | $ | 165,180 | $ | (34,492) | (20.9) | % | ||||||
| As a percentage of revenue | 19.9 | % | 21.0 | % |
Sales and marketing expense decreased by $34.5 million, or 20.9%, to $130.7 million for the year ended December 31, 2022 compared to $165.2 million for the year ended December 31, 2021. As a percentage of revenue, sales and marketing expense decreased to 19.9% for the year ended December 31, 2022 from 21.0% for the year ended December 31, 2021. The decrease in sales and marketing expense was driven primarily by a reduction in equity-based compensation primarily due to the prior period accelerated vesting of $10.2 million in connection with the unvested and outstanding Class B unit awards upon completion of the initial public offering, a decrease in professional services fees, a decrease in advertising costs, and a decrease in commissions.
General and Administrative
| Year-ended December 31, | Change | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | Amount | % | |||||||||||
| (dollars in thousands) | ||||||||||||||
| General and administrative | $ | 166,824 | $ | 158,555 | $ | 8,269 | 5.2 | % | ||||||
| As a percentage of revenue | 25.4 | % | 20.2 | % |
General and administrative expense increased by $8.3 million, or 5.2%, to $166.8 million for the year ended December 31, 2022 compared to $158.6 million for the year ended December 31, 2021. As a percentage of revenue, general and administrative expense increased to 25.4% for the year ended December 31, 2022 from 20.2% for the year ended December 31, 2021. The increase in general and administrative expense was driven primarily by equity-based compensation of $83.7 million, due to an accelerated vesting of $40.5 million in connection with the current period modifications related to
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awards held by the CEO and certain directors compared to equity-based compensation of $36.9 million in connection with the prior period acceleration of vesting of all unvested and outstanding Class B unit awards upon completion of the initial public offering, combined with higher personnel-related expenses. The increase was partially offset by lower professional service fees primarily due to the suspension of the Traeger Provisions' business and one-time costs related to the initial public offering.
Amortization of Intangible Assets
| Year-ended December 31, | Change | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | Amount | % | |||||||||||
| (dollars in thousands) | ||||||||||||||
| Amortization of intangible assets | $ | 35,554 | $ | 34,379 | $ | 1,175 | 3.4 | % | ||||||
| As a percentage of revenue | 5.4 | % | 4.4 | % |
Amortization of intangible assets, substantially attributable to the 2017 corporate reorganization and acquisition of the Company and the July 2021 acquisition of Apption Labs, increased $1.2 million, or 3.4%, to $35.6 million for the year ended December 31, 2022 compared to $34.4 million for the year ended December 31, 2021.
Change in Fair Value of Contingent Consideration
| Year-ended December 31, | Change | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | Amount | % | |||||||||||
| (dollars in thousands) | ||||||||||||||
| Change in fair value of contingent consideration | $ | 10,002 | $ | 3,800 | $ | 6,202 | 163.2 | % | ||||||
| As a percentage of revenue | 1.5 | % | 0.5 | % |
Change in fair value of contingent consideration, attributable to the revalued earn out obligation associated with the Apption Labs business combination, increased $6.2 million, or 163.2%, to $10.0 million for the year ended December 31, 2022 compared to $3.8 million for the year ended December 31, 2021. The change in fair value of contingent consideration was driven primarily by the increase in the likelihood of achieving the performance targets.
Goodwill Impairment
| Year-ended December 31, | Change | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | Amount | % | |||||||||||
| (dollars in thousands) | ||||||||||||||
| Goodwill impairment | $ | 222,322 | $ | — | $ | 222,322 | 100.0 | % | ||||||
| As a percentage of revenue | 33.9 | % | — | % |
The Company recorded non-cash goodwill impairment of $222.3 million for the year ended December 31, 2022, compared to no impairment for the year ended December 31, 2021. The non-cash goodwill impairment was primarily driven by our reporting unit's sustained decrease in discounted projections of estimated operating results and cash flows, the sustained decrease in our publicly quoted share price and market capitalization, as well as decreased valuation multiples compared to publicly traded companies, resulting in our reporting units carrying amount exceeding its fair value.
Restructuring Costs
| Year-ended December 31, | Change | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | Amount | % | |||||||||||
| (dollars in thousands) | ||||||||||||||
| Restructuring costs | $ | 9,324 | $ | — | $ | 9,324 | 100.0 | % | ||||||
| As a percentage of revenue | 1.4 | % | — | % |
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The Company recorded restructuring costs of $9.3 million for the year ended December 31, 2022 compared to no restructuring costs for the year ended December 31, 2021. The restructuring costs were primarily due to reduction in force, suspended operations of Traeger Provisions, and postponed near-shoring efforts to manufacture product in Mexico.
Total Other Expense
| Year-ended December 31, | Change | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | Amount | % | |||||||||||
| (dollars in thousands) | ||||||||||||||
| Interest expense | $ | (27,885) | $ | (26,646) | $ | 1,239 | 4.6 | % | ||||||
| Loss on extinguishment of debt | — | (5,185) | (5,185) | (100.0) | % | |||||||||
| Other income (expense) | (7,127) | 2,702 | 9,829 | 363.8 | % | |||||||||
| Total other expense | $ | (35,012) | $ | (29,129) | $ | 5,883 | 20.2 | % | ||||||
| As a percentage of revenue | (5.3) | % | (3.7) | % |
Total other expense increased by $5.9 million, or 20.2%, to $35.0 million for the year ended December 31, 2022 compared to $29.1 million for the year ended December 31, 2021. This increase was due primarily to an unfavorable change in our foreign currency contracts, losses recorded associated with foreign currency denominated transactions, and higher interest expense due to greater utilization of our Credit Facilities and incremental borrowing on the First Lien Term Loan Facility. These increases were offset by the loss on extinguishment of debt in the prior period.
Liquidity and Capital Resources
Historically, our cash requirements have principally been for working capital purposes, capital expenditures, and debt service payments. We have funded our operations through cash flows from operating activities, cash on hand, and borrowings under our credit facilities and receivables financing agreement. The Company maintains the majority of its cash and cash equivalents in accounts with major U.S. and multi-national financial institutions including JPMorgan Chase Bank, HSBC, World First Bank, Handelsbanken, and Stadtsparkasse München, and our deposits at these institutions exceed insured limits. Market conditions can impact the viability of these institutions. In the event of failure of any of the financial institutions where we maintain our cash and cash equivalents, there can be no assurance that we would be able to access uninsured funds in a timely manner or at all. Any inability to access or delay in accessing these funds could adversely affect our business and financial position.
As of December 31, 2022, we had cash and cash equivalents of $39.1 million, restricted cash of $12.5 million, $125.0 million borrowing capacity under our Revolving Credit Facility (as defined below) and up to $15.0 million borrowing capacity under our Receivables Financing Agreement (as defined below). As of December 31, 2022, we had drawn down $72.0 million on the Revolving Credit Facility and $11.7 million under the Receivables Financing Agreement. As of December 31, 2022, the total principal amount outstanding under our First Lien Term Loan Facility (as defined below) was $404.1 million. Based on our current business plan and revenue prospects, we continue to believe that our existing cash and cash equivalents, availability under our Revolving Credit Facility and Receivables Financing Agreement, and our anticipated cash flows from operating activities will be sufficient to meet our working capital and operating resource expenditure requirements for at least the next twelve months from the date of this Annual Report on Form 10-K. However, our future working capital requirements will depend on many factors, including our rate of revenue growth and profitability, the timing and size of future acquisitions, and the timing of introductions of new products and investments in our supply chain and implementation of technologies.
We may from time to time seek to raise additional equity or debt financing to support our growth or in connection with the acquisition of complementary businesses. Any equity financing we may undertake could be dilutive to our existing stockholders, and any additional debt financing we may undertake could require debt service and financial and operational requirements that could adversely affect our business. There is no assurance we would be able to obtain future financing on acceptable terms or at all. In particular, the widespread COVID-19 pandemic has resulted in, and may continue to result in, significant disruption of global financial markets, reducing our ability to access capital. See Part I, Item 1A.“Risk Factors.”
In connection with the IPO, we granted RSUs. Specifically, 7,782,957 shares of our common stock are issuable in connection with the vesting of the CEO Awards. In addition, 4,380,285 shares of our common stock are issuable in connection with the vesting of IPO RSUs granted to others under the 2021 Plan, including to our Chief Financial Officer and certain of our directors, which awards became effective in connection with the IPO. In light of the large number of RSUs subject to the IPO Awards and the acceleration of vesting of RSUs and PSUs held by certain of our employees, we have incurred and we
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anticipate that we will continue to incur substantial equity-based compensation expenses and may expend substantial funds to satisfy tax withholding and remittance obligations related to these RSUs. The accelerated vesting was determined to be a modification and therefore, we evaluated each of the modified awards to determine the necessary accounting treatment. Vesting of the awards was assessed as probable immediately prior to and after the modification resulting in an acceleration of the remaining expense based on the original grant date fair value. As a result of the modification, we recorded approximately $39.4 million of accelerated equity-based compensation for the year ended December 31, 2022.
In addition, in connection with the completion of the Company’s IPO, Class B Units that were outstanding and vested were, as part of the statutory corporate conversion effected in July 2021, converted into shares of common stock of the Company. The Company recorded equity compensation expense of approximately $47.4 million as a result of the acceleration of vesting of the unvested Class B Units based on the IPO price of $18.00. Given the proximity of the modification to the IPO, the expense recorded by the Company was based on the actual conversion of the Class B Unit into common stock and the valuation of the Company at time of the IPO.
Cash Flows
The following table sets forth cash flow data for the periods indicated therein (in thousands):
| Year-ended December 31, | |||||||
|---|---|---|---|---|---|---|---|
| 2022 | 2021 | ||||||
| Net cash provided by (used in) operating activities | $ | 5,094 | $ | (28,427) | |||
| Net cash used in investing activities | (18,904) | (79,897) | |||||
| Net cash provided by financing activities | 48,625 | 113,508 | |||||
| Net increase in cash, cash equivalents, and restricted cash | $ | 34,815 | $ | 5,184 |
Cash Flow from Operating Activities
During the year ended December 31, 2022, net cash provided by operating activities consisted of a net loss of $382.1 million and net non-cash adjustments to net loss of $381.0 million, partially offset by net changes in operating assets and liabilities of $6.2 million. Non-cash adjustments consisted of depreciation of property, plant, and equipment of $13.8 million, amortization of intangible assets of $42.7 million, equity-based compensation of $87.7 million, goodwill impairment of $222.3 million, change in fair value of contingent consideration of $6.7 million, and unrealized losses on derivative contracts of $2.4 million. The increase in net cash from net changes in operating assets and liabilities during the year ended December 31, 2022 was primarily due to a decrease in accounts receivable of $51.1 million, partially offset by an increase in inventories of $11.9 million and a decrease in accounts payable and accrued expenses of $28.2 million.
During the year ended December 31, 2021, net cash used in operating activities consisted of net loss of $91.8 million and net non-cash adjustments to net income of $145.7 million, partially offset by net changes in operating assets and liabilities of $82.3 million. Non-cash adjustments consisted of depreciation of property, plant, and equipment of $9.2 million, amortization of intangible assets of $38.4 million, equity-based compensation of $81.1 million, and unrealized losses on foreign currency contracts of $4.8 million. The decrease in net cash from net changes in operating assets and liabilities during the year ended December 31, 2021 was primarily due to an increase in accounts receivable of $26.4 million and an increase in inventories of $67.8 million, offset in part by an increase in accounts payable and accrued expenses of $19.2 million.
Cash Flow from Investing Activities
During the year ended December 31, 2022, net cash used in investing activities was $18.9 million. The cash flow used was driven by the purchase of property, plant, and equipment of $18.4 million primarily related to internal-use software and website developments costs, the purchase of tooling equipment, and wood pellet production equipment.
During the year ended December 31, 2021, net cash used in investing activities was $79.9 million. The cash flow used was driven primarily by the acquisition of Apption Labs in July 2021, net of cash acquired, of $56.9 million, as well as the purchase of property, plant, and equipment of $22.5 million primarily related to the purchase of wood pellet production equipment, tooling, and internal-use software and website developments costs.
Cash Flow from Financing Activities
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During the year ended December 31, 2022, net cash provided by financing activities was $48.6 million. The cash flow provided was driven primarily by net borrowings on our lines of credit under the Revolving Credit Facility and Receivables Financing Agreement, of $33.6 million for general corporate and working capital purposes, as well as the borrowings under the delayed draw term loan of $25.0 million for purposes of financing the earn out obligation associated with the acquisition of Apption Labs.
During the year ended December 31, 2021, net cash provided by financing activities was $113.5 million. The cash flow used was driven primarily by $142.3 million of proceeds from the issuance of our common stock upon the IPO, net of offering costs, as well as net proceeds from our First Lien Term Loan Facility of $510.0 million partially offset by the repayment of the First Lien Credit Agreement and Second Lien Credit Agreement of $446.4 million and the repayment of $130.8 million on the First Lien Term Loan Facility using proceeds from the IPO.
Credit Facilities
On June 29, 2021, we refinanced our existing credit facilities and entered into a new first lien credit agreement, as borrower, with Credit Suisse AG, Cayman Islands Branch, as administrative agent and collateral agent, and other lenders party thereto as joint lead arrangers and joint bookrunners (the "First Lien Credit Agreement"). The First Lien Credit Agreement provides for a senior secured term loan facility (the "First Lien Term Loan Facility"), and a revolving credit facility (the "Revolving Credit Facility" and, together with the First Lien Term Loan Facility, the "Credit Facilities").
First Lien Credit Agreement
The First Lien Credit Facility provides for a $560.0 million First Lien Term Loan Facility (including a $50.0 million delayed draw term loan) and a $125.0 million Revolving Credit Facility.
The First Lien Term Loan Facility accrues interest at a rate per annum that considers both fixed and floating components. Following completion of our IPO in July 2021, the fixed component ranges from 3.00% to 3.25% per annum based on our Public Debt Rating (as defined in the First Lien Credit Agreement). The floating component is based on the Eurocurrency Base Rate (as defined in the First Lien Credit Agreement) for the relevant interest period. The First Lien Term Loan Facility requires quarterly principal payments from December 2021 through June 2028, with any remaining unpaid principal and any accrued and unpaid interest due on the maturity date of June 29, 2028. The delayed draw term loan includes a variable commitment fee, which is based on the fixed interest rate and ranges from 0% to the Applicable Rate (as defined in the First Lien Credit Agreement). During 2022, the Company borrowed $25.0 million under the delayed draw term loan, for purposes of financing the Company's earn out obligation. The borrowing took place prior to the expiration of the delayed draw term commitment date of December 29, 2022. The outstanding amounts borrowed through the delayed draw term loan are recorded in the First Lien Term Loan Facility. As of December 31, 2022, the total principal amount outstanding on the First Lien Term Loan Facility was $404.1 million.
Loans under the Revolving Credit Facility accrue interest at a rate per annum that considers both fixed and floating components. Following completion of our IPO in July 2021, the fixed component ranges from 2.75% to 3.25% per annum based on our most recently determined First Lien Net Leverage Ratio (as defined in the First Lien Credit Agreement). The floating component is based on the Eurocurrency Base Rate for the relevant interest period. The Revolving Credit Facility also has a variable commitment fee, which is based on our most recently determined First Lien Net Leverage Ratio and ranges from 0.25% to 0.50% per annum on undrawn amounts. Letters of credit may be issued under the Revolving Credit Facility in an amount not to exceed $15.0 million which, when issued, lower the overall borrowing capacity of the facility. The Revolving Credit Facility expires on June 29, 2026 and no principal payments are due before such date. As of December 31, 2022, the total outstanding principal balance under the Revolving Credit Facility was $72.0 million.
Except as noted below, the Credit Facilities are collateralized by substantially all of the assets of TGP Holdings III LLC, TGPX Holdings II LLC, Traeger Pellet Grills Holdings LLC and certain subsidiaries of Traeger Pellet Grills Holdings LLC, including intellectual property, mortgages and the equity interest of each of these respective entities. The assets of Traeger SPE LLC, substantively consisting of our accounts receivable, collateralize the receivables financing agreement discussed below and do not collateralize the Credit Facilities. There are no guarantees from any entities above TGPX Holdings II LLC, including Traeger, Inc.
The First Lien Credit agreement contains certain affirmative and negative covenants that limit our ability to, among other things, incur additional indebtedness or liens (with certain exceptions), make certain investments, engage in fundamental changes or transactions including changes of control, transfer or dispose of certain assets, make restricted payments (including dividends), engage in new lines of business, make certain prepayments and engage in certain affiliate transactions. In addition,
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we are subject to a financial covenant whereby we are required to maintain a First Lien Net Leverage Ratio (as defined in the First Lien Credit Agreement) not to exceed 6.20 to 1.00.
On August 9, 2022, we entered into a second amendment (the “Amendment”) to the First Lien Credit Agreement to provide for a “Covenant Amendment Period” (as defined therein) through and including the earlier of June 30, 2023 and the date on which we, in our sole discretion, deliver written notice to the Administrative Agent of our election to end the Covenant Amendment Period. During that period, our springing First Lien Net Leverage Ratio covenant will be increased from 6.20 : 1.00 to 8.50 : 1.00 and a minimum liquidity covenant of $35.0 million will be in effect. Liquidity will be calculated as the sum of cash on our balance sheet, availability under our Revolving Credit Facility and availability under our Receivables Financing Agreement (as defined below), and the minimum liquidity covenant will be tested only if and when we request borrowings under our Revolving Credit Facility. During the Covenant Amendment Period, the fixed dollar portion of the “Fixed Dollar Amount” definition shall decrease from $127.0 million to $102.0 million, and the use of certain restricted payments baskets will be reduced or eliminated entirely. As of December 31, 2022, we were in compliance with the covenants under the New Credit Facilities.
Accounts Receivable Credit Facility
On November 2, 2020, we entered into a receivables financing agreement, as amended, or the Receivables Financing Agreement. Pursuant to the Receivables Financing Agreement, we participate in a trade receivables securitization program administered by MUFG Bank Ltd. Through this arrangement, we have secured short-term capital requirements financing using outstanding accounts receivable balances as collateral, which have been contributed by us to a wholly owned subsidiary, Traeger SPE LLC. As a special purpose entity (the "SPE"), Traeger SPE LLC has been structured such that its assets (substantively the accounts receivable contributed by us to the SPE) are outside the reach of other creditors, including the lenders under our First Lien Credit Agreement. While we provide services to the SPE through continuing involvement in the aspects of collection and cash application of the receivables, the receivables are owned by the SPE once contributed to it by us. We are the primary beneficiary and hold all equity interests of the SPE, thus we consolidate the SPE without any significant judgments.
On June 29, 2021, we entered into Amendment No. 1 to the Receivables Financing Agreement and increased the net borrowing capacity from the prior range of $30.0 million to $45.0 million up to $100.0 million. As of December 31, 2022, we have drawn down $11.7 million under this facility for general corporate and working capital purposes. Absent any cash advances that exceed the SPE’s available cash, the SPE collects proceeds from the receivables and transfers available cash to us on a regular basis. We are required to pay an annual upfront fee for the facility, along with interest on outstanding cash advances of approximately 1.7%, and an unused capacity charge that ranges from 0.25% to 0.50%. The facility is set to terminate on June 29, 2024.
Contractual Obligations
As of December 31, 2022, significant contractual obligations related to debt were $476.1 million of principal borrowings and $189.4 million of related interest, which will become due on the maturity date of June 29, 2028. Projected interest costs on variable rate instruments were calculated using market rates at December 31, 2022. See Note 12 – Notes Payable to the accompanying consolidated financial statements for additional information regarding our Credit Facilities.
We have various lease agreements related to office space, warehouses, vehicles, and office equipment that expire at various dates through 2034. As of December 31, 2022, the future minimum rental payments under non-cancelable operating leases was $15.6 million. See Note 4 – Leases to the accompanying consolidated financial statements for additional information regarding our non-cancellable operating leases.
We also have purchase obligations consisting of agreements to purchase goods and services entered into in the ordinary course of business. As of December 31, 2022, the future minimum value of our non-cancellable unconditional purchase obligations was $6.1 million. See Note 14 – Commitments and Contingencies to the accompanying consolidated financial statements for additional information regarding our purchase obligations.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with U.S. GAAP. The preparation of our financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect certain reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period.
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While our significant accounting policies are described in further detail in Note 2 – Summary of Significant Accounting Policies to the accompanying consolidated financial statements included in this Annual Report on Form 10-K, we believe that the following critical accounting policies reflect our more significant judgments and estimates used that management believes are particularly important in the preparation of our consolidated financial statements and that require the use of estimates, assumptions and judgments to determine matters that are inherently uncertain.
Revenue Recognition
As discussed in the “Revenue Recognition and Sales Returns and Allowances” section in Note 2 – Summary of Significant Accounting Policies to the accompanying consolidated financial statements, we adopted the new revenue recognition standard, ASC 606, Revenue from Contracts with Customers, at the beginning of 2019.
We determine revenue recognition through the following steps in accordance with ASC 606:
•identification of the contract, or contracts, with a customer;
•identification of the performance obligations in the contract;
•determination of the transaction price;
•allocation of the transaction price to the performance obligations in the contract; and
•recognition of revenue when, or as, we satisfy a performance obligation.
We derive substantially all of our revenue from the sale of grills, consumables, and accessories as well as associated shipping charges billed to customers. We recognize revenue at the amount to which we expect to be entitled when a contract exists with a customer that specifies the goods and services to be provided at an agreed upon sales price and when the performance obligation is satisfied. The performance obligation for most of our sales transactions are considered complete when control transfers, which is determined when products are shipped or delivered to the customer depending on the terms of the contract. Sales are made on normal and customary short-term credit terms or upon delivery of point-of-sale transactions.
Shipping charges billed to customers are included in net sales and related shipping costs are included in cost of sales. We elected to account for shipping and handling activities performed after control has been transferred to the customer as a fulfillment cost.
We enter into contractual arrangements with customers in the form of individual customer orders which specify the goods, quantity, pricing, and associated order terms. We do not have long-term contracts that are satisfied over time. Due to the nature of the contracts, no significant judgment exists in relation to the identification of the customer contract or satisfaction of the performance obligation. We expense incremental costs of obtaining a contract due to the short-term nature of the contracts.
We have various contractual programs and practices with customers that give rise to elements of variable consideration such as customer cooperative advertising and volume incentive rebates. We estimate the variable consideration using the most likely amount method based on sales and contractual rates with each customer and record the estimated amount of credits for these programs as a reduction to revenue. Actual credits and their impact on reported revenue could differ from our estimates and could materially affect our results of operations.
We have entered into contracts with some customers that allow for credits to be claimed for certain matters of operational compliance or for returns to the retail customer from its end consumers. Credits that will be issued associated with these items are estimated using the expected value method and are based on actual historical experience and are recorded as a reduction of revenue at the time of recognition or when circumstances change resulting in a change in estimated returns. Actual credits and their respective impacts on reported revenue could differ from our estimates and could materially affect our results of operations.
Valuation of Goodwill and Acquired Intangible Assets
Intangible Assets
Finite-lived intangible assets are initially recorded at fair value and presented net of accumulated amortization. Intangible assets are amortized on a straight-line basis over their estimated useful lives. We are currently amortizing acquired intangible assets, including customer relationships, distributor relationships, non-compete arrangements, business trademarks, technology and other intangible assets over periods ranging between 2.5 years and 25 years. These assets were recognized in the purchase price allocation when we underwent a corporate restructuring and acquisition in 2017, as well as when we acquired Apption
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Labs in July 2021. We assess the impairment of intangible assets whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
An impairment loss on intangible assets exists when the estimated undiscounted cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount. If the carrying amount exceeds the sum of the undiscounted cash flows, an impairment charge is recognized based on the amount by which the carrying amount of the assets exceeds the estimated fair value of the assets.
Goodwill
Goodwill represents the excess of consideration transferred over the fair value of tangible and identifiable intangible net assets acquired and the liabilities assumed in a business combination. Substantially all of the Company’s goodwill was recognized in the purchase price allocations when the Company was acquired in 2017 and when Apption Labs was acquired in July 2021, with smaller incremental amounts recognized in other business combinations. Goodwill is not amortized, but is tested for impairment at the reporting unit level annually or more frequently if events or changes in circumstances indicate that it is more likely than not that the fair value of the reporting unit is less than its carrying amount. In conducting the impairment test, the Company first reviews qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. We currently operate as a single reporting unit under the guidance in Topic 350, Intangibles - Goodwill and Other.
When testing goodwill for impairment, the Company has the option of first performing a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. If we elect to bypass the qualitative assessment, or if a qualitative assessment indicates it is more likely than not that carrying value exceeds its fair value, we perform a quantitative goodwill impairment test. Under the quantitative goodwill impairment test, if our reporting unit’s carrying amount exceeds its fair value, we will record an impairment charge based on that difference.
To determine reporting unit fair value as part of the quantitative test, we use a weighting of fair values derived from the income approach and the market approach. Under the income approach, the Company projects the future cash flows and discount these cash flows to reflect their relative risk. The cash flows used are consistent with those the Company uses in its internal planning, which reflects actual business trends experienced and our long-term business strategy. Under the market approach, we use the guideline company method to develop valuation multiples and compare our reporting unit to similar publicly traded companies.
In order to further validate the reasonableness of fair value as determined by the income and market approaches described above, a reconciliation to market capitalization is then performed by estimating a reasonable control premium and other market factors. Future changes in the judgments, assumptions and estimates that are used in the impairment testing for goodwill could result in significantly different estimates of fair value.
The Company conducts annual goodwill impairment tests in the fourth quarter of each fiscal year or whenever an indicator of impairment exist. For the annual impairment tests conducted in the fourth quarters of 2022 and 2021, the Company performed qualitative assessments of goodwill and determined that it was more likely than not that the fair value of goodwill was greater than its carrying value, therefore the quantitative impairment test was not performed and no impairment of goodwill was recorded in connection with the annual impairment tests. Due to impairment indicators identified during the second and third quarters of 2022, the Company performed interim goodwill impairment tests and concluded that the carrying value of the single reporting unit exceeded its fair value and recorded $222.3 million of non-cash goodwill impairment charges for the fiscal year ended December 31, 2022. For details associated with the Company's interim goodwill impairment testing, see Note 11 – Goodwill and Intangibles.
Equity-Based Compensation
We record equity-based compensation expense related to Class B incentive units awards issued by TGP Holdings LP, formerly our parent company, consistent with the compensation expense associated with the holder of the incentive units. The units granted by TGP Holdings LP have been issued for services performed on behalf of us. Therefore, the expense associated with these awards is pushed down to us.
The incentive unit grants are measured for expensing purposes at the grant date based on the fair value of the award. The incentive unit grants consist of time-based vesting units, ordinary performance vesting units, and extraordinary performance vesting units. In connection with the completion of our IPO, we recorded equity-based compensation as a result of the acceleration of vesting of all unvested and outstanding Class B Units.
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In addition, we award equity-based compensation to employees and directors under the 2021 Plan. We measure compensation expense for time-based and performance-based RSU awards on a straight-line basis over the vesting schedule and on an accelerated attribution basis over the tranche's requisite service period, respectively. In addition, we recognize forfeitures as they occur, however, when an award is forfeited prior to the vesting date, we will recognize an adjustment for the previously recognized expense in the period of the forfeiture, with the exception of performance-based awards for which the requisite service period has been provided.
We use the Monte Carlo pricing model to estimate the fair value of our performance-based RSU awards as of the grant date, and use various simulations of future stock prices through the Stochastic model to estimate the fair value over the remaining term of the performance period as of the grant date