Business Context and Reporting Period
BellRing Brands, Inc. filed its first Form 10-K for the fiscal year ended September 30, 2019. The historical operating results are presented for Post Holdings’ Active Nutrition business, the predecessor to BellRing, and include allocated Post corporate expenses. BellRing Brands, Inc. had no operations through September 30, 2019 and completed its initial public offering on October 21, 2019.
The business markets convenient nutrition products under the Premier Protein, Dymatize and PowerBar brands, including ready-to-drink protein beverages, powders, nutrition bars and supplements. Premier Protein generated approximately 80% of fiscal 2019 net sales. The United States represented 86% of net sales, while Costco and Walmart, including Sam’s Club, collectively represented approximately 70%.
Key Financial Metrics
| Metric | Fiscal 2019 | Fiscal 2018 | Change |
|---|---|---|---|
| Net sales | $854.4 million | $827.5 million | Up 3% |
| Gross profit | $311.8 million | $277.7 million | Up 12% |
| Gross margin | 36% | 34% | Up 2 percentage points |
| Earnings before income taxes | $162.5 million | $119.8 million | Up 36% |
| EBIT margin | 19% | 14% | Up 5 percentage points |
| Net earnings | $123.1 million | $96.1 million | Up 28% |
| Effective tax rate | 24.2% | 19.8% | Up 4.4 percentage points |
| Cash flow from operating activities | $98.3 million | $141.2 million | Down $42.9 million |
| Capital expenditures | $3.2 million | $5.0 million | Down $1.8 million |
| Cash and cash equivalents | $5.5 million | $10.9 million | Down $5.4 million |
Fiscal 2019 net earnings were approximately 14% of net sales. The balance sheet at September 30, 2019 included total assets of $594.5 million, total liabilities of $108.1 million and parent company equity of $486.4 million. Inventories increased to $138.2 million from $61.6 million, primarily reflecting replenishment of previously low finished-goods inventory.
The historical predecessor financial statements did not present standalone debt because U.S. cash management and financing were historically provided by Post. Following the IPO, BellRing Brands, LLC assumed or entered into $700.0 million of term debt and $100.0 million of revolving borrowings. After a $40.0 million repayment on October 31, 2019, revolving borrowings were $60.0 million and available revolving capacity was $140.0 million. Total debt outstanding after the IPO was approximately $760.0 million, excluding undrawn capacity.
Material Changes Versus Prior Comparable Period
- Net sales increased $26.9 million, or 3%. Premier Protein sales increased $43.8 million, or 7%, while Dymatize sales increased $4.3 million, or 4%.
- PowerBar sales declined $15.6 million, or 26%, due to distribution losses and reductions of low-performing North American products.
- RTD protein shake and other RTD sales increased to $662.1 million from $608.5 million. RTD products represented approximately 78% of fiscal 2019 net sales, compared with 74% in fiscal 2018.
- Fiscal 2019 RTD volume growth was constrained by manufacturing-capacity delays and temporary product availability reductions. All flavors were reintroduced during the second quarter, and management reported materially higher inventory levels thereafter.
- Gross profit increased primarily because of higher sales and lower raw-material and freight costs. EBIT also benefited from $19.6 million of lower net product costs and $5.4 million of lower marketing spending.
- Fiscal 2019 included $6.7 million of separation costs related to the Post separation. Fiscal 2018 included a $9.0 million litigation settlement accrual. Fiscal 2017 included a $26.5 million Dymatize goodwill impairment charge.
- Adoption of the revenue standard on October 1, 2018 reclassified $8.8 million of customer payments from selling, general and administrative expense to net sales. The adoption did not affect earnings before income taxes.
- Operating cash flow declined because of unfavorable working-capital changes, principally the $77.2 million increase in inventory as RTD shake stocks were rebuilt.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide a specific fiscal 2020 revenue or earnings guidance range. Management expects continued growth in convenient nutrition, supported by consumer interest in active lifestyles, protein and on-the-go nutrition. Management also expects positive operating cash flow and believes cash on hand, operating cash flow and available credit facilities will fund working capital and other requirements for the foreseeable future. No significant fiscal 2020 capital expenditures were planned.
- Concentration risk: Approximately 75% of fiscal 2019 net sales came from RTD protein shakes. Approximately 81% of Premier Protein RTD shake supply came from one contract manufacturer, and approximately 51% came from one facility of that manufacturer. The company also relied on a sole supplier for certain 11-ounce shake packaging.
- Customer concentration: Two customers accounted for approximately 38% and 32% of fiscal 2019 net sales, respectively. The filing identifies these customers as Costco and Walmart and its affiliates in the broader business discussion.
- Leverage and interest rates: The post-IPO credit facilities mature on October 21, 2024. The term loan carries a 5.00% Eurodollar margin or 4.00% base-rate margin, and the revolving facility initially carries a 4.25% Eurodollar margin or 3.25% base-rate margin. Each 100-basis-point change in LIBOR was estimated to change annual cash interest expense by approximately $8 million.
- Debt covenants: BellRing Brands, LLC must maintain a total net leverage ratio of no more than 6.00 to 1.00 beginning with the quarter ending March 31, 2020. The debt is secured by substantially all assets of BellRing Brands, LLC and its domestic subsidiary guarantors, excluding real property.
- Post control: Post retained 71.2% of the economic interest in BellRing Brands, LLC and voting control through its Class B share, representing 67% of combined voting power while Post owns more than 50% of the LLC units.
- Tax receivable agreement: BellRing generally must pay Post 85% of certain realized or deemed tax savings. The filing estimated a $12.9 million payable to Post at October 21, 2019. An early termination immediately after the IPO was estimated to require approximately $473.1 million, although actual obligations will vary.
- Litigation: Joint Juice consumer class actions remained pending, including an appeal of a dismissed California case and additional state-law complaints. Management stated that the matter was not expected to have a material adverse effect; an $8.5 million accrual remained recorded at September 30, 2019.
- Other risks: Competition, commodity and packaging costs, supply-chain disruptions, food safety and product liability, regulatory compliance, foreign currency exposure, cybersecurity, goodwill impairment and the costs of operating as a standalone public company.
Investor Verification Checklist
- Verify the transition from predecessor combined financial statements to BellRing’s post-IPO consolidated reporting, including noncontrolling interests attributable to Post.
- Reconcile the post-IPO debt balances, interest rates, amortization schedule, maturity date, collateral and leverage-covenant calculations.
- Assess whether RTD production capacity and inventory levels are sufficient to support projected demand without renewed product shortages.
- Monitor revenue and margin dependence on Premier Protein and the two largest customers.
- Review the tax receivable agreement for expected payment timing, potential acceleration upon a change of control or early termination, and cash-flow effects.
- Track the Joint Juice litigation, the contract-manufacturer dispute and the adequacy of related accruals.
- Adjust historical expense expectations for standalone public-company costs and the services provided by Post under the master services agreement.
- Confirm the impact of the new lease accounting standard adopted October 1, 2019; management estimated initial right-of-use assets and lease liabilities of approximately $10 million to $20 million.