PETIQ, INC. The following is a discussion of our results of operations and current financial condition. This should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and our audited consolidated financial statements for the year endedDecember 31, 2021 and related notes included in the annual report forPetIQ, Inc. , filed with theSecurities and Exchange Commission (the "SEC") on Form 10-K for the year endedDecember 31, 2021 . This discussion contains forward-looking statements that reflect our plans, estimates, and beliefs and involve numerous risks and uncertainties. Actual results may differ materially from those contained in any forward-looking statements. See "Cautionary Note Regarding Forward-Looking Statements."
Business Overview -
PetIQ is a leading pet medication and wellness company delivering a smarter way for pet parents to help their pets live their best lives through convenient access to affordable veterinary products and services. We engage with customers through more than 60,000 points of distribution across retail and e-commerce channels with our branded and distributed medications as well as health and wellness items, which are further supported by our world-class medications manufacturing facility inOmaha, Nebraska and health and wellness manufacturing facility inSpringville, Utah . Our national service platform, operates in over 2,600 retail partner locations in 41 states, providing cost effective and convenient veterinary wellness services.PetIQ believes that pets are an important part of the family and deserve the best products and care that we can give them. 20
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We have two reporting segments: (i) Products; and (ii) Services. The Products segment consists of our manufacturing and distribution business. The Services segments consists of veterinary services and products provided by the Company directly to consumers. We are the sole managing member ofPetIQ Holdings, LLC ("HoldCo"), aDelaware limited liability company, which is the sole member ofPetIQ, LLC ("Opco") and, throughHoldco , operate and control all of the business and affairs of Opco.
Results of Operations
The following tables set forth our condensed consolidated statements of
operations in dollars and as a percentage of net sales for the periods
presented:
For the Three Months Ended % of Net Sales
$'s in 000's June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021
Product sales $ 219,014 $ 242,857 86.9% 89.6%
Services revenue 33,000 28,154 13.1% 10.4%
Total net sales 252,014 271,011 100.0% 100.0%
Cost of products sold 163,568 185,837 64.9% 68.6%
Cost of services 26,472 25,546 10.5% 9.4%
Total cost of sales 190,040 211,383 75.4% 78.0%
Gross profit 61,974 59,628 24.6% 22.0%
Selling, general and administrative expenses 50,595 43,142 20.1% 15.9%
Operating income 11,379 16,486 4.5% 6.1%
Interest expense, net 6,299 7,655 2.5% 2.8%
Loss on debt extinguishment - 5,453 -% 2.0%
Other income, net (201) (451) (0.1)% (0.2)%
Total other expense, net 6,098 12,657 2.4% 4.7%
Pretax net income 5,281 3,829 2.1% 1.4%
Income tax (expense) benefit (603) 205 (0.2)% 0.1%
Net income 4,678 4,034 1.9% 1.5%
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For the Six Months Ended % of Net Sales
$'s in 000's June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021
Product sales $ 466,764 $ 472,891 88.5% 90.0%
Services revenue 60,945 52,467 11.5% 10.0%
Total net sales 527,709 525,358 100.0% 100.0%
Cost of products sold 354,419 368,664 67.2% 70.2%
Cost of services 53,681 49,267 10.2% 9.4%
Total cost of sales 408,100 417,931 77.3% 79.6%
Gross profit 119,609 107,427 22.7% 20.4%
Selling, general and administrative expenses 98,831 83,814 18.7% 16.0%
Operating income 20,778 23,613 3.9% 4.5%
Interest expense, net 12,420 12,525 2.4% 2.4%
Loss on debt extinguishment - 5,453 -% 1.0%
Other income, net (204) (655) -% (0.1)%
Total other expense, net 12,216 17,323 2.3% 3.3%
Pretax net income 8,562 6,290 1.6% 1.2%
Income tax (expense) benefit (724) 130 (0.1)% -%
Net income 7,838 6,420 1.5% 1.2%
The following tables set forth financial information relating to the Company's operating segments for the periods presented:
For the Three Months Ended For the Six Months Ended
$'s in 000's June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021
Products segment sales $ 219,014 $ 242,857 $ 466,764 $ 472,891
Services segment revenue:
Same-store sales 28,264 22,172 48,989 42,090
Non same-store sales 4,736 5,982 11,956 10,377
Total services segment revenue $ 33,000 $ 28,154 $ 60,945 $ 52,467
Total net sales $ 252,014 $ 271,011 $ 527,709 $ 525,358
Adjusted EBITDA
Products $ 43,380 $ 48,187 $ 91,289 $ 86,979
Services 4,740 3,028 7,824 5,124
Unallocated Corporate (20,538) (16,856) (39,936) (30,883)
Total Adjusted EBITDA $ 27,582 $ 34,359 $ 59,177 $ 61,220 Three Months Ended
Net sales ConsolidatedNet Sales Consolidated net sales decreased$19.0 million or 7.0%, to$252.0 million for the three months endedJune 30, 2022 , compared to$271.0 million for the three months endedJune 30, 2021 . This decrease was driven by lower product sales, which declined by$23.8 million of which approximately$11.8 million was due to lost distribution of certain manufacturers' products to certain customers and due to negative macroeconomic trends in consumer spending, partially offset by price increases. The Services segment revenues grew by$4.8 million as we served more pets and increased our average dollar per pet served. 22
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Products Segment
Product sales decreased$23.8 million , or 9.8%, to$219.0 million for the three months endedJune 30, 2022 , compared to$242.9 million for the three months endedJune 30, 2021 . The decrease was driven by lost distribution of certain manufacturers' products to certain customers which reduced sales by approximately$11.8 million and due to negative macroeconomic trends in consumer spending, partially offset by price increases. Additionally there was a shift of sales from the second quarter of 2022 to the first quarter of 2022 as compared to timing of similar sales in 2021. This is evidenced by the smaller decline in sales on a six months endedJune 30 basis.
Services Segment
Services revenues increased$4.8 million , or 17.2%, from$28.2 million to$33.0 million for the three months endedJune 30, 2022 , compared to the three months endedJune 30, 2021 . Same-store sales increased$6.1 million , or 27.5%, to$28.3 million for the three months endedJune 30, 2022 , compared to$22.2 million for the three months endedJune 30, 2021 . The increase in same-store sales was driven by increased average dollar per pet served as well as a small increase in pet counts. Non same-store sales decreased$1.2 million or 20.8%, to$4.7 million for the three months endedJune 30, 2022 , compared to$6.0 million for the three months endedJune 30, 2021 . The decrease in non same-store sales was due to lower store count driven by a number of wellness centers aging into the same-store base. Gross profit Gross profit increased by$2.3 million , or 3.9%, to$62.0 million for the three months endedJune 30, 2022 , compared to$59.6 million for the three months endedJune 30, 2021 . This increase is due to improvements in Services segment gross profit of$3.9 million , partially offset by Products segment gross profit declining by$1.6 million . Gross margin increased to 24.6% for the three months endedJune 30, 2022 , compared to 22.0% for the three months endedJune 30, 2021 . Products segment gross margin improved due to the mix of products sold as our manufactured product sales increased and due to the impact of pricing. Additionally, Services segment margin grew due to efficiency improvements and due to increased average dollar per pet served.
Selling, General and administrative expenses
Consolidated selling, general and administrative expenses ("SG&A") increased by
$7.5 million , or 17.3%, to $50.6 million for the three months ended June 30,
2022 , compared to $43.1 million for the three months ended June 30, 2021 . As a
percentage of net sales, SG&A increased from 15.9% for the three months ended
June 30, 2021 to 20.1% for the three months ended June 30, 2022 . The Company had
higher selling and marketing costs for both Products and Services segment to
support the launch of new products and was impacted by inflationary pressures
across other categories.
Products Segment
Products segment SG&A increased $2.1 million or approximately 18.6% to $13.4
million for the three months ended June 30, 2022 , compared to $11.3 million for
the three months ended June 30, 2021 . This increase was primarily due to higher
selling costs related to product launches.
Services Segment
Services segment SG&A increased$0.8 million , or 12.7%, to$7.1 million for the three months endedJune 30, 2022 , compared to$6.3 million for the three months endedJune 30, 2021 . This increase was driven by increased variable costs on higher sales. Unallocated Corporate Unallocated corporate G&A increased$4.6 million , or 18.0%, to$30.2 million for the three months endedJune 30, 2022 , from$25.6 million for the three months endedJune 30, 2021 . The increase was related to the following:
?Increase in marketing and advertising of
?Additional corporate compensation of approximately
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?A legal contingency accrual of approximately
Interest expense, net
Interest expense, net, decreased$1.4 million to$6.3 million for the three months endedJune 30, 2022 , compared to$7.7 million for the three months endedJune 30, 2021 . This decrease was driven by the lower rates on the new debt, as the Company refinanced a majority of its debt in the second quarter of 2021.
Provision for income taxes
Our effective tax rate was 11.5% and (5.4%) for the three months endedJune 30, 2022 and 2021, respectively, with a tax expense of$0.6 million and a tax benefit of$0.2 million , respectively. The tax rate is different than theU.S federal statutory income tax rate of 21% primarily due to the effects of a change in valuation allowance, state taxes, and foreign Global Intangible Low-Taxed Income ("GILTI ") income inclusion.
Segment Adjusted EBITDA
Products Segment
Products segment Adjusted EBITDA decreased$4.8 million , or 10.0% to$43.4 million for the three months endedJune 30, 2022 , compared to$48.2 million for the three months endedJune 30, 2021 . Products segment Adjusted EBITDA fluctuates based on the quantity and mix of products sold, specifically whether the products are produced byPetIQ , or are distributed for other manufacturers. The reduction in Products segment Adjusted EBITDA relates primarily to lower total sales partially offset by higher margin percentage on improved mix of manufactured vs. distributed products. Services Segment Services segment Adjusted EBITDA increased$1.7 million , or 56.5% to$4.7 million for the three months endedJune 30, 2022 , compared to$3.0 million for the three months endedJune 30, 2021 . Services segment Adjusted EBITDA can fluctuate considerably for the Services segment based on the volume of pets seen in clinics, due to the relatively fixed cost nature of clinic costs. Services segment EBITDA improved as a result of efficiency initiatives as well as the company's scheduling optimization efforts and increased average dollar per pet served. Unallocated Corporate Unallocated corporate expenses consist of corporate costs including accounting, legal, human resources, information technology, and headquarters expenses, as well as executive compensation and company incentive compensation expenses, and other miscellaneous costs. Unallocated corporate costs have primarily grown due to the growth in the size of the Company. Adjustments to unallocated corporate costs include expenses related to specific events, such as acquisition 24
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expenses and integration costs. Adjustments also include non-cash expenses, such as depreciation, amortization, and stock based compensation.
The following tables reconcile Segment pre-tax net income to Adjusted EBITDA for the periods presented.
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