BellRing Brands, Inc. — Q3 FY2020 Form 10-Q
Reporting period: Quarter and nine months ended June 30, 2020. Amounts are in millions, except per-share data. BellRing sells convenient nutrition products, primarily under the Premier Protein, Dymatize and PowerBar brands. The October 2019 IPO changed the reporting basis and ownership structure; 2019 results largely predate the IPO, and 2019 EPS is not comparable because no Class A shares were then outstanding.
Financial performance
| Metric | Three months 2020 | Three months 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $204.2 | $237.6 | $705.7 | $639.9 |
| Gross profit | $68.7 | $90.5 | $248.2 | $235.1 |
| Gross margin | 33.6% | 38.1% | 35.2% | 36.7% |
| Operating profit | $30.6 | $52.8 | $115.0 | $126.5 |
| Operating margin | 15.0% | 22.2% | 16.3% | 19.8% |
| Interest expense, net | $15.3 | — | $41.2 | — |
| Net earnings, including redeemable NCI | $14.2 | $40.3 | $64.6 | $96.4 |
| Net earnings available to Class A holders | $3.3 | — | $13.5 | — |
| Class A diluted EPS | $0.08 | — | $0.34 | — |
Third-quarter sales fell 14%, while nine-month sales rose 10%. Nine-month gross profit increased despite lower gross margin; operating profit declined in both comparisons. The filing reports no EBITDA figure.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $27.2, versus $59.4 in 2019; capital expenditures were $1.3, versus $1.8. Cash provided by operations less capital expenditures was $25.9, compared with $57.6.
- Cash was $22.5 at June 30, 2020, up from $5.5 at September 30, 2019. Current assets were $290.6 and current liabilities $127.1.
- Debt principal totaled $737.5: $682.5 under the Term B Facility and $55.0 under the revolver. Balance-sheet debt, net of discounts and issuance costs, was $718.9, including $35.0 current and $683.9 long-term. The Term B rate was 6.00%; drawn revolver rate was 5.25%.
- Revolver capacity available was $145.0, with no letters of credit outstanding. The company complied with its maximum 6.00-to-1.00 total net leverage covenant at quarter-end.
- Balance-sheet total liabilities were $853.0 and redeemable noncontrolling interest was $1,943.6. Stockholders’ equity was negative $2,136.7, largely reflecting the accounting for the redeemable NCI and IPO-related transactions.
Material changes and management commentary
- Q3 sales decreased $33.4. Premier Protein sales declined 12%, mainly as customers reduced purchases after building inventory in March and as on-the-go consumption weakened; promotional activity also lowered average selling prices. Dymatize sales fell 17%, and PowerBar sales fell 44%, amid weaker specialty/international demand, store and gym disruptions, and product discontinuations.
- For the nine months, Premier Protein sales grew 17%, primarily on distribution gains, new products and prior-year capacity constraints. Dymatize sales fell 10% and PowerBar fell 26%.
- Q3 operating profit declined $22.2, with lower sales, higher product costs, advertising and promotion, and public-company costs among the drivers. Nine-month operating profit fell $11.5, including higher advertising and promotion, product, warehousing and public-company costs.
- Interest expense arose following the debt issuance associated with the IPO and formation transactions. Interest-rate swaps had a $350.0 notional amount; their designation changed in April 2020 after they were deemed no longer effective as cash-flow hedges.
- Management expected positive operating cash flow and believed cash, operating cash flow and possible future credit facilities would meet foreseeable requirements. It planned no significant capital expenditures for the rest of FY2020. No quantified earnings or sales guidance was provided.
Risks, contingencies and unusual items
- COVID-19 drove category-wide slower growth, reduced on-the-go and sports-nutrition consumption, customer inventory adjustments, and pressure on Dymatize and PowerBar from store and gym closures. Management cited continuing uncertainty around demand, supply chains, operations and liquidity.
- The company drew an additional $65.0 on its revolver as a precautionary liquidity measure during Q2 and repaid it in May 2020.
- Key risks include high leverage and debt service, reliance on third-party manufacturers and suppliers (including one manufacturer for most RTD shakes), dependence on RTD protein shakes, commodity and input-cost volatility, competition, and Post’s control and related-party arrangements.
- Joint Juice advertising-related class actions remain pending; the company had an $8.5 accrual and stated it did not expect the litigation to materially affect its financial condition, results or cash flows. Other proceedings were also described as not expected to be material.
- Post owned 71.2% of BellRing LLC’s economic interest at quarter-end; its redeemable units are recorded at redemption value. The tax receivable agreement generally entitles Post to 85% of certain realized tax savings.
Investor verification points
- Check whether sales and margins recover from Q3’s customer inventory adjustment and pandemic-related channel weakness, particularly for Premier Protein, Dymatize and PowerBar.
- Track inventory, which rose to $184.6 from $138.2 at September 30, 2019, alongside cash generation and customer demand.
- Review debt repayment, interest expense, covenant headroom and revolver availability; debt principal was $737.5 and cash was $22.5 at quarter-end.
- Assess Post’s continuing control, redeemable NCI valuation and tax receivable agreement obligations when interpreting earnings attributable to public Class A holders.
- Monitor COVID-19 impacts and the status or any change in the Joint Juice litigation and its $8.5 accrual.