BellRing Brands, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2022. Amounts are in millions except per-share data. Results are unaudited.
Business context
BellRing sells convenient nutrition products, principally Premier Protein and Dymatize protein shakes, beverages, powders and nutrition bars. On March 10, 2022, Post Holdings completed the spin-off of BellRing, making BellRing an independent public company and eliminating its dual-class voting structure. The spin-off and related merger, financing and tax changes affect comparisons with prior periods.
Financial performance
| Metric | Three months ended March 31, 2022 | Prior year | Six months ended March 31, 2022 | Prior year |
|---|---|---|---|---|
| Net sales | $315.2 | $282.1 | $621.7 | $564.5 |
| Gross profit | $87.0 | $87.0 | $179.3 | $178.9 |
| Operating profit | $33.2 | $15.6 | $83.8 | $63.4 |
| Net earnings available to common stockholders | $1.3 | $0.6 | $9.5 | $8.4 |
| Diluted EPS | $0.02 | $0.02 | $0.19 | $0.21 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $17.6 | $73.8 |
Quarterly sales rose 12%; six-month sales rose 10%. In the quarter, Premier Protein sales increased $15.2 (7%), supported by pricing but partly offset by a 4% volume decline. Dymatize sales increased $19.7 (55%), including 25% volume growth. Six-month Premier Protein volume declined 6%, while Dymatize volume increased 16%.
Quarterly gross profit was unchanged despite higher sales, reflecting cost pressure. Operating profit improved partly because prior-year results included accelerated Supreme Protein amortization of $17.7 and current-period advertising costs were lower by $12.9. These benefits were partly offset by $38.0 of higher net product costs and $10.3 of spin-off expenses. For the six months, higher net product costs were $67.8, spin-off expenses were $12.3, and advertising costs were lower by $14.0. Net earnings available to common stockholders were affected by a $17.6 debt-extinguishment and refinancing loss in the current period.
Financial position, debt and liquidity
- At March 31, 2022, cash was $69.5, down from $152.6 at September 30, 2021. Receivables were $132.5 and inventory was $144.7, compared with $103.9 and $117.9, respectively, at fiscal year-end.
- Total debt principal was $949.0: $840.0 of 7.00% senior notes due March 2030 and $109.0 drawn under a $250.0 revolving facility due March 2027. Available revolver capacity was $141.0. The notes are unsecured; the revolving facility is secured by substantially all company and subsidiary-guarantor assets, excluding real property.
- The company repaid the former Term B Facility and terminated its prior credit agreement in March. The related $17.6 loss included write-offs of debt and hedging costs. The new credit agreement requires a total net leverage ratio no greater than 6.00 to 1.00, beginning with the quarter ending June 30, 2022; management said the ratio would have been within the limit at March 31.
- Six-month operating cash flow was $17.6, investing cash outflow was $1.1, and financing cash outflow was $99.5. Cash declined by $83.1. Management attributed the operating cash-flow decrease mainly to unfavorable working-capital movements, including receivables and inventory build, partly offset by lower interest payments.
- Stockholders’ deficit was $428.8. The balance sheet and per-share comparisons are affected by the spin-off, the change in ownership structure, and the increase in weighted-average shares.
Outlook, commentary and risks
No numerical sales or earnings guidance is provided in the filing. Management expects positive operating cash flow and believes cash on hand, operating cash flow and potential future credit facilities can meet foreseeable requirements. The asset-light model has historically required modest capital spending, and no significant capital expenditures were planned for the remainder of fiscal 2022.
Management said supply constraints, below-normal service levels and fill rates, product allocation, and delayed third-party manufacturing capacity expansion had caused low inventories and missed sales. These conditions were improving but were expected to persist through fiscal 2022, subject to manufacturers’ ability to deliver volumes, add capacity and rebuild inventories. Raw-material, packaging and freight inflation, as well as labor and input availability, pressured margins; the company had taken pricing actions on nearly all products.
Key risks include reliance on third-party manufacturers—one supplies the substantial majority of RTD shakes—and limited suppliers for certain ingredients and packaging; input-cost and freight volatility; high leverage and debt covenant restrictions; competition and customer demand; and risks related to the spin-off, including tax-free treatment and indemnification obligations. The filing also cites COVID-19 and the ongoing conflict in Ukraine as sources of economic uncertainty.
BellRing continues to defend multiple consumer lawsuits alleging misleading advertising for the discontinued Joint Juice product line. A New York case was scheduled for trial on May 23, 2022; the company had accrued $8.5 and stated it did not expect the litigation to materially affect its financial condition, results or cash flows. The tax matters agreement may expose the company to tax liabilities in specified circumstances if the spin-off fails to qualify for intended tax treatment or if certain actions breach the agreement.
Important facts for investors to verify
- Whether manufacturing capacity, service levels and inventory recovery improve as expected, and whether supply constraints continue to limit sales volumes.
- Whether pricing actions offset ongoing raw-material, packaging, freight and manufacturing cost inflation without weakening demand.
- Cash conversion and working-capital trends, particularly the increase in receivables and inventory and the decline in six-month operating cash flow.
- Debt levels, interest costs, revolver availability and compliance with the new leverage covenant beginning in the June 2022 quarter.
- Potential tax consequences and indemnification exposure under the spin-off tax matters agreement, and developments in the Joint Juice litigation.
- The effects of the spin-off and changes in ownership, taxes, shares outstanding and noncontrolling-interest accounting when interpreting year-over-year earnings and EPS.