Beyond Meat, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter ended September 26, 2020; comparisons are with the quarter ended September 28, 2019. The filing also reports nine-month results. Amounts below are in millions unless stated otherwise.
Financial results and liquidity
| Metric | Q3 2020 | Q3 2019 | Year-over-year change |
|---|---|---|---|
| Net revenue | $94.4 | $92.0 | +2.7% |
| Gross profit / gross margin | $25.5 / 27.0% | $32.8 / 35.6% | Profit down 22.1%; margin down 860 bps |
| Operating income (loss) | $(18.5) | $3.6 | Turned to loss |
| Net income (loss) | $(19.3) | $4.1 | Turned to loss |
| Diluted EPS | $(0.31) | $0.06 | Turned to loss |
| Adjusted EBITDA (non-GAAP) | $(4.3) | $11.0 | Margin: (4.5)% vs. 12.0% |
Nine months: Revenue rose 52.9% to $304.8; gross profit rose 46.1% to $96.9, while gross margin declined to 31.8% from 33.2%. Operating loss was $24.8 versus operating income of $0.4 in the prior-year period; net loss was $27.7 versus net loss of $12.0. Adjusted EBITDA was $21.3 versus $15.8.
Cash flow and balance sheet: Nine-month operating cash use was $42.7, investing cash use was $39.7, and financing cash provided was $21.3. Cash and equivalents were $214.6 at quarter-end, down from $276.0 at December 31, 2019. Inventory increased to $132.4 from $81.6. Property, plant and equipment, net, was $77.0. The company had $50.0 drawn on its $150.0 secured revolving facility and reported $100.0 of excess availability, subject to covenant limitations. It was in compliance with the facility’s financial covenants at quarter-end. Management said cash, operating cash flow and available borrowings were expected to cover working capital and anticipated capital needs for the next 12 months.
Business context and material changes
Beyond Meat sells plant-based meat products through retail and foodservice channels in the U.S. and internationally. Products were available at approximately 122,000 retail and foodservice outlets in more than 80 countries. COVID-19 materially shifted demand from foodservice toward retail, while disrupting customer operations, product launches and supply planning.
- Q3 U.S. retail revenue increased 40.5% to $62.1; international retail rose 26.7% to $8.0.
- Q3 U.S. foodservice revenue fell 11.1% to $16.3; international foodservice fell 65.1% to $8.1. Total foodservice revenue was $24.4, up 78.1% from Q2 but 40.8% below Q1.
- Retail revenue declined 29.7% sequentially from $99.6 in Q2 to $70.0 in Q3, following the second-quarter surge in at-home demand.
- Management attributed Q3 revenue growth mainly to retail distribution gains, higher sales velocity and new products, partly offset by lower net pricing from promotions and a shift toward larger packs.
Management outlook, risks and unusual items
- Outlook: No numerical revenue or earnings guidance is provided. Management expected COVID-19 to adversely affect revenue, gross profit, margins, earnings and cash flows through at least the remainder of 2020 and likely into 2021. It expected foodservice revenue to remain significantly pressured, while the trajectory of retail demand remained uncertain.
- Margins and costs: Q3 cost of goods sold was 73.0% of revenue versus 64.4% a year earlier. Management cited lower net price realization, reduced fixed-cost absorption as production was scaled back, higher shipping costs, and $1.8 of COVID-related inventory write-offs/reserves and repacking costs. Nine-month COVID-related costs were $10.4, including repacking, inventory charges and product donations.
- Spending and capacity: Nine-month capital expenditures were $38.0. The company expanded production in Europe, began preparations for China manufacturing, and expected trial production in China by year-end 2020 with full-scale production in early 2021. It committed to $177.5 of pea-protein purchases through 2022 and had $19.3 of capital-expenditure purchase orders due within 12 months. On October 30, 2020, it acquired manufacturing assets and a workforce from a former co-manufacturer for $14.5, subject to adjustments.
- Debt and covenants: The April 2020 secured revolving facility matures in 2025 and is secured by substantially all company assets. Financial covenants include a maximum total leverage ratio of 3.00:1 and minimum fixed-charge coverage ratio of 1.25:1. Borrowings were at a 3.5% interest rate at quarter-end.
- Litigation: The Don Lee Farms dispute remained active, with trial scheduled for June 14, 2021; the company said any reasonably possible material loss was not estimable. A securities class action was dismissed with prejudice on October 27, 2020, subject to appeal; certain absent putative class allegations were dismissed without prejudice. Related derivative actions were stayed or pending, and potential losses were not estimable.
- Other risks: Risks include renewed COVID-19 restrictions, supply-chain and manufacturing disruption, pea-protein availability and cost, competition, promotional pricing, international expansion, and regulatory challenges to meat-related product labeling. The filing also noted that France had adopted restrictions on certain animal-origin food names for foods containing vegetable proteins.
Most important facts for investors to verify
- Whether retail demand can sustain growth as the pandemic-related surge recedes, and whether foodservice recovers amid renewed restrictions.
- Whether gross margins improve despite discounting, lower production utilization, inventory repacking and write-offs.
- Cash burn, inventory growth, planned capital spending, and the company’s ability to preserve liquidity while funding expansion.
- Progress and costs of the Europe, China and acquired U.S. manufacturing capacity, including timing of production ramp-ups.
- Exposure under the $177.5 pea-protein purchase commitments and compliance with secured-credit covenants.
- Developments in the Don Lee Farms litigation and derivative actions, including any change in the company’s inability to estimate potential losses.