Beyond Meat, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 28, 2020; comparisons are with the three months ended March 30, 2019. Figures are in U.S. dollars unless stated otherwise.
Business context
Beyond Meat sells plant-based meat products through retail and foodservice channels in the U.S. and internationally. Products were available in approximately 94,000 points of distribution across 75 countries at quarter-end. The quarter began with strong sales momentum, but COVID-19 restrictions slowed foodservice demand in the latter half of March while retail demand rose as consumers shifted toward at-home consumption.
Financial performance
| Metric | Q1 2020 | Prior-year quarter |
|---|---|---|
| Net revenue | $97.1 million | $40.2 million |
| Gross profit / gross margin | $37.7 million / 38.8% | $10.8 million / 26.8% |
| Operating income (loss) | $1.8 million | ($5.3 million) |
| Net income (loss) | $1.8 million | ($6.6 million) |
| Adjusted EBITDA | $12.7 million (13.1% of revenue) | ($2.1 million) ((5.3%) of revenue) |
| Cash used in operating activities | $17.2 million | $13.3 million |
| Cash used in investing activities | $13.4 million | $5.0 million |
Revenue increased 141.4%, primarily from higher sales volumes, expanded distribution, stronger retail sales velocity and newer products, partly offset by lower net price per pound. Retail revenue grew 185.4% and foodservice revenue 99.7%. U.S. revenue rose 156.4%; international revenue rose 105.9%. Total product volume sold increased 143.5%.
Gross margin improved 12 percentage points, attributed to volume growth, production efficiencies, lower direct material and packaging costs, and labor and variable-cost efficiencies. Operating expenses rose to $35.9 million from $16.1 million, including higher selling, administrative, R&D and restructuring costs. Restructuring expense was $2.4 million, mainly legal and other costs related to a former co-manufacturer dispute.
Balance sheet, cash flow and debt
- Cash and cash equivalents were $246.4 million at March 28, 2020, down $29.6 million from year-end 2019. Current assets were $415.9 million and current liabilities $72.0 million.
- Inventory increased to $120.7 million from $81.6 million, contributing to operating cash outflow as the company built inventory for anticipated sales and longer international shipping lead times and made supplier prepayments.
- Capital expenditures included $12.4 million of property and equipment purchases. Property, plant and equipment, net, increased to $61.8 million from $47.5 million.
- Total debt outstanding, net of debt issuance costs, was $30.6 million. At quarter-end, the company had no availability under its existing SVB credit facilities and was in compliance with their covenants.
- On April 21, 2020, after quarter-end, the company replaced those facilities and its equipment loan with a $150 million, five-year secured revolving credit agreement, with an accordion feature for up to an additional $200 million. The company incurred $1.2 million in termination, prepayment and related fees. The filing does not state how much, if any, was drawn under the new facility.
Outlook, risks and unusual items
- The company expected COVID-19 to adversely affect operations and results for at least the balance of 2020, with a greater negative foodservice impact in Q2 than in Q1. Management said the effects were difficult to estimate and gave no numeric revenue or earnings guidance.
- Management expected Q2 gross margins and profitability to decline versus Q1, citing foodservice-to-retail production shifts, repackaging, value packs, aggressive pricing and increased discounts. Retail demand had not fully offset lower foodservice sales.
- Risks include supply-chain and facility disruption, pea-protein availability and pricing, demand uncertainty, competition, international expansion execution and the ability to comply with covenants on the new secured credit facility. The new facility has quarterly maximum leverage and minimum fixed-charge coverage requirements.
- As of March 28, the company reported $198.1 million of pea-protein inventory purchase commitments through 2022, including $64.7 million for the remainder of 2020, $74.9 million for 2021 and $58.5 million for 2022; it also had $27.3 million of capital-expenditure purchase-order commitments due within 12 months.
- Material legal matters include the Don Lee Farms dispute, for which the company said a reasonably possible material loss range was not estimable, and securities, derivative and TCPA putative class actions. The company said it intended to defend the claims; potential losses for the derivative action were not estimable.
- The company adopted lease accounting standard ASC 842 on January 1, 2020, recognizing operating lease right-of-use assets and liabilities. The filing also reports a full valuation allowance against substantially all U.S. deferred tax assets.
Important facts for investors to verify
- Whether retail growth can sustainably offset weaker foodservice demand, and the recovery path for foodservice customers.
- Q2 and full-year effects of COVID-19 on revenue, gross margin, cash flow, production and international expansion; no quantified outlook was provided.
- Inventory growth, supplier prepayments and the timing of conversion of inventory into sales and cash.
- Utilization, borrowing costs, collateral and covenant headroom under the new secured credit agreement.
- The timing and financial exposure from the Don Lee Farms litigation and the other disclosed legal actions.
- The relationship between the reported $198.1 million of pea-protein commitments and the agreement’s stated $154.1 million aggregate minimum purchase amount.