BellRing Brands(BRBR) - 2021 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION. This part presents the unaudited condensed consolidated financial statements and management's discussion and analysis, along with market risk disclosures and controls Item 1. Financial Statements (Unaudited). This section provides unaudited condensed consolidated financial statements and detailed notes on accounting policies and financial instruments Condensed Consolidated Statements of Operations (Unaudited). This statement presents the company's revenues, expenses, and net earnings for the specified period Condensed Consolidated Statements of Operations (Three Months Ended December 31) | Metric | 2020 (in millions) | 2019 (in millions) | Change ($ in millions) | Change (%) | | :------------------------------------ | :----------------- | :----------------- | :--------- | :--------- | | Net Sales | $282.4 | $244.0 | $38.4 | 16% | | Gross Profit | $91.9 | $91.3 | $0.6 | 1% | | Operating Profit | $47.8 | $49.3 | $(1.5) | (3)% | | Interest expense, net | $12.8 | $11.6 | $(1.2) | (10)% | | Income tax expense | $2.1 | $5.9 | $3.8 | 64% | | Net Earnings Available to Class A Common Stockholders | $7.8 | $6.0 | $1.8 | 30% | | Basic EPS | $0.20 | $0.15 | $0.05 | 33% | | Diluted EPS | $0.20 | $0.15 | $0.05 | 33% | Condensed Consolidated Statements of Comprehensive Income (Unaudited). This statement details the company's total comprehensive income, including net earnings and other comprehensive income components Condensed Consolidated Statements of Comprehensive Income (Three Months Ended December 31) | Metric | 2020 (in millions) | 2019 (in millions) | | :---------------------------------------------------- | :----------------- | :----------------- | | Net Earnings Including Redeemable Noncontrolling Interest | $32.9 | $31.8 | | Total Other Comprehensive Income Including Redeemable Noncontrolling Interest | $1.4 | $1.1 | | Total Comprehensive Income Available to Class A Common Stockholders | $8.2 | $6.6 | Condensed Consolidated Balance Sheets (Unaudited). This statement provides a snapshot of the company's assets, liabilities, and equity at specific points in time Condensed Consolidated Balance Sheets (as of) | Metric | December 31, 2020 (in millions) | September 30, 2020 (in millions) | | :------------------------------------ | :------------------------------ | :------------------------------- | | Total Current Assets | $324.6 | $290.2 | | Total Assets | $680.8 | $653.5 | | Total Current Liabilities | $138.3 | $153.1 | | Total Liabilities | $810.9 | $814.5 | | Redeemable noncontrolling interest | $2,369.6 | $2,021.6 | | Total Stockholders' Equity | $(2,499.7) | $(2,182.6) | Condensed Consolidated Statements of Cash Flows (Unaudited). This statement summarizes the cash inflows and outflows from operating, investing, and financing activities Condensed Consolidated Statements of Cash Flows (Three Months Ended December 31) | Activity | 2020 (in millions) | 2019 (in millions) | | :------------------------------------ | :----------------- | :----------------- | | Net Cash Provided by (Used in) Operating Activities | $23.3 | $(24.9) | | Net Cash Used in Investing Activities | $0.0 | $(0.7) | | Net Cash (Used in) Provided by Financing Activities | $(22.0) | $49.9 | | Net Increase in Cash and Cash Equivalents | $2.1 | $24.4 | | Cash and Cash Equivalents, End of Period | $50.8 | $29.9 | Condensed Consolidated Statements of Stockholders' Equity (Unaudited). This statement outlines changes in the company's stockholders' equity over the reporting period Condensed Consolidated Statements of Stockholders' Equity (as of and for the Three Months Ended December 31) | Metric | December 31, 2020 (in millions) | December 31, 2019 (in millions) | | :------------------------------------ | :------------------------------ | :------------------------------- | | Common Stock (End of period) | $0.4 | $0.4 | | Accumulated Deficit (End of period) | $(2,496.5) | $(2,276.9) | | Total Stockholders' Equity (End of period) | $(2,499.7) | $(2,278.2) | Notes to Condensed Consolidated Financial Statements (Unaudited). These notes provide essential context and detailed explanations for the condensed consolidated financial statements Note 1 - Background and Basis of Presentation This note describes the company's business, corporate structure, and the basis for financial statement presentation - BellRing Brands, Inc. is a consumer products holding company in the global convenient nutrition category, primarily offering RTD protein shakes, other RTD beverages, powders, nutrition bars, and nutritional supplements under brands like Premier Protein and Dymatize[28][78] - The company completed its IPO on October 21, 2019, contributing net proceeds to BellRing Brands, LLC in exchange for membership units; BellRing Inc. controls BellRing LLC, while Post Holdings, Inc. controls BellRing Inc. through Class B common stock[28][80] - As of December 31, 2020, Post held 71.2% of the economic interest in BellRing LLC, and BellRing Inc. indirectly held 28.8% of the economic interest in BellRing LLC[28][80] Note 2 - Recently Issued and Adopted Accounting Standards This note discusses the impact and evaluation of recently issued and adopted accounting standards on the company's financials - The company is evaluating the impact of ASU 2020-04 (Reference Rate Reform) on its debt and hedging relationships[33] - The adoption of ASU 2016-13 (Credit Losses) on October 1, 2020, did not have a material impact on the company's consolidated financial statements[34] Note 3 - Revenue This note provides a detailed breakdown of the company's net sales by product category Net Sales by Product (Three Months Ended December 31) | Product Category | 2020 (in millions) | 2019 (in millions) | | :----------------------- | :----------------- | :----------------- | | Shakes and other beverages | $234.2 | $199.8 | | Powders | $35.4 | $29.0 | | Nutrition bars | $11.6 | $13.9 | | Other | $1.2 | $1.3 | | Total Net Sales | $282.4 | $244.0 | Note 4 - Restructuring This note outlines the company's restructuring plan, associated charges, and liabilities - In October 2020, the company announced a plan to strategically realign its business, involving the closing of its Dallas, Texas office and downsizing of its Munich, Germany location, expected to be completed by the end of fiscal 2021[36][82] Restructuring Charges and Liabilities (as of December 31, 2020) | Metric | Amount (in millions) | | :------------------------------------ | :------------------- | | Balance, September 30, 2020 | $0.0 | | Charge to expense | $4.5 | | Cash payments | $(0.4) | | Balance, December 31, 2020 | $4.1 | | Total expected restructuring charges | $4.7 | | Cumulative restructuring charges incurred to date | $4.5 | | Remaining expected restructuring charges | $0.2 | Note 5 - Related Party Transactions This note details transactions and agreements between the company and Post Holdings, Inc - The company utilizes various functions and services from Post Holdings, Inc. under a master services agreement (MSA), incurring $0.6 million in MSA fees and $0.8 million in stock-based compensation expense for the three months ended December 31, 2020[41] - BellRing LLC paid $3.2 million to Post for quarterly tax distributions and $0.4 million for state corporate tax withholdings during the three months ended December 31, 2020[41] - The company has a tax receivable agreement with Post, requiring payment of 85% of certain cash tax savings; amounts payable related to this agreement were $10.9 million at December 31, 2020[41] Note 6 - Redeemable Noncontrolling Interest This note explains the nature and changes in the redeemable noncontrolling interest held by Post Holdings - Post Holdings held 97.5 million BellRing LLC units, representing 71.2% economic interest, classified as redeemable noncontrolling interest (NCI) due to Post's option to redeem units for Class A Common Stock or cash[43] - The carrying amount of NCI was recorded at its redemption value of $2,369.6 million as of December 31, 2020, up from $2,021.6 million at September 30, 2020[43] Changes to Redeemable Noncontrolling Interest (Three Months Ended December 31) | Metric | 2020 (in millions) | 2019 (in millions) | | :------------------------------------ | :----------------- | :----------------- | | Beginning of period | $2,021.6 | $0.0 | | Net earnings attributable to NCI after IPO | $25.1 | $20.3 | | Redemption value adjustment to NCI | $321.9 | $689.8 | | End of period | $2,369.6 | $2,075.2 | Note 7 - Income Taxes This note provides details on the company's effective income tax rate and its contributing factors Effective Income Tax Rate (Three Months Ended December 31) | Period | Effective Income Tax Rate | | :------------------------------------ | :------------------------ | | December 31, 2020 | 6.0% | | December 31, 2019 | 15.6% | - The decrease in the effective income tax rate was primarily due to the company taking into account its 28.8% distributive share of BellRing LLC's income, gain, loss, and deduction items post-IPO, compared to reporting 100% prior to the IPO[48] Note 8 - Earnings Per Share This note presents the calculation of basic and diluted earnings per share for Class A Common Stock Basic and Diluted Earnings Per Share (Three Months Ended December 31) | Metric | 2020 | 2019 | | :---------------------------------------------------- | :----- | :----- | | Net earnings available to Class A Common Stockholders for basic earnings per share (in millions) | $7.8 | $6.0 | | Weighted average shares for basic earnings per share (in millions) | 39.5 | 39.4 | | Basic earnings per share of Class A Common Stock | $0.20 | $0.15 | | Diluted earnings per share of Class A Common Stock | $0.20 | $0.15 | Note 9 - Inventories This note provides a breakdown of the company's inventory components, including raw materials and finished products Inventories (as of) | Category | December 31, 2020 (in millions) | September 30, 2020 (in millions) | | :----------------------- | :------------------------------ | :------------------------------- | | Raw materials and supplies | $26.2 | $33.7 | | Work in process | $0.1 | $0.1 | | Finished products | $110.1 | $116.7 | | Total Inventories | $136.4 | $150.5 | Note 10 - Property, Net This note details the company's property, plant, and equipment, net of accumulated depreciation Property, Net (as of) | Category | December 31, 2020 (in millions) | September 30, 2020 (in millions) | | :----------------------- | :------------------------------ | :------------------------------- | | Property, at cost | $21.7 | $22.6 | | Accumulated depreciation | $(12.0) | $(12.4) | | Property, net | $9.7 | $10.2 | Note 11 - Goodwill This note presents the company's goodwill balance, including accumulated impairment losses Goodwill (as of December 31, 2020 and September 30, 2020) | Category | Amount (in millions) | | :-------------------------- | :------------------- | | Goodwill, gross | $180.7 | | Accumulated impairment losses | $(114.8) | | Goodwill | $65.9 | Note 12 - Intangible Assets, Net This note provides a breakdown of the company's intangible assets, net of amortization Intangible Assets, Net (as of) | Category | December 31, 2020 (Net Amount, in millions) | September 30, 2020 (Net Amount, in millions) | | :-------------------------- | :---------------------------------------- | :----------------------------------------- | | Customer relationships | $129.4 | $132.5 | | Trademarks and brands | $139.0 | $141.8 | | Other intangible assets | $0.0 | $0.0 | | Intangible assets, net | $268.4 | $274.3 | - The company finalized its plan to discontinue the Supreme Protein brand, updating the useful lives of associated customer relationships ($18.7 million) and trademarks ($11.8 million) to be fully amortized by June 1, 2021[56] Note 13 - Leases This note details the company's operating lease liabilities and right-of-use assets Operating Lease Liabilities (as of) | Category | December 31, 2020 (in millions) | September 30, 2020 (in millions) | | :-------------------------- | :------------------------------ | :------------------------------- | | ROU assets (Other assets) | $11.3 | $11.9 | | Total lease liabilities | $12.5 | $13.2 | - Operating lease expense was $1.0 million for the three months ended December 31, 2020, with a weighted average remaining lease term of approximately 5 years[61] Note 14 - Derivative Financial Instruments This note describes the company's use of derivative instruments for hedging and their fair value - The company uses pay-fixed, receive-variable interest rate swaps with a notional amount of $350.0 million to hedge forecasted interest payments on variable rate debt, maturing in December 2022[62] - On April 1, 2020, the interest rate swaps' designation changed from cash flow hedges to non-designated hedging instruments due to ineffectiveness, leading to reclassification of losses from accumulated OCI to "Interest expense, net"[62] Derivative Liabilities (Fair Value as of) | Category | December 31, 2020 (in millions) | September 30, 2020 (in millions) | | :-------------------------- | :------------------------------ | :------------------------------- | | Total derivative liabilities | $9.2 | $10.4 | Note 15 - Fair Value Measurements This note provides fair value measurements for various financial instruments and liabilities Fair Value Measurements (as of) | Category | December 31, 2020 (Total, in millions) | September 30, 2020 (Total, in millions) | | :-------------------------- | :------------------------------------- | :-------------------------------------- | | Derivative liabilities | $9.2 | $10.4 | | NCI | $2,369.6 | $2,021.6 | | Term B Facility (Fair Value) | $638.5 | $674.0 | Note 16 - Long-Term Debt This note details the components of the company's long-term debt, including facilities and repayment activities Long-Term Debt Components (as of) | Category | December 31, 2020 (in millions) | September 30, 2020 (in millions) | | :-------------------------- | :------------------------------ | :------------------------------- | | Term B Facility | $636.2 | $673.7 | | Revolving Credit Facility | $50.0 | $30.0 | | Total principal amount of debt | $686.2 | $703.7 | | Long-term debt (net) | $635.1 | $622.6 | - The company repaid $37.5 million on the Term B Facility during the three months ended December 31, 2020, including a $28.8 million mandatory prepayment from excess cash flow[71] - Borrowings under the Term B Facility and Revolving Credit Facility bear variable interest rates (6.00% and 5.25% respectively as of December 31, 2020)[71] Note 17 - Commitments and Contingencies This note outlines the company's legal commitments and contingencies, including ongoing litigation - The company is vigorously defending multiple class action lawsuits related to its Joint Juice line of products, with an accrued liability of $8.5 million at December 31, 2020[74][75] - Management believes the ultimate liability from pending legal proceedings and compliance matters will not have a material adverse effect on the company's financial condition, results of operations, or cash flows[75] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Management discusses financial performance, liquidity, and capital resources, including COVID-19 impacts and restructuring efforts Overview This section provides a high-level introduction to the company's business, structure, and key financial allocations - BellRing Brands, Inc. is a consumer products holding company in the global convenient nutrition category, with primary brands Premier Protein and Dymatize[78] - The company completed its IPO on October 21, 2019, and BellRing Inc. controls BellRing LLC, while Post Holdings, Inc. controls BellRing Inc.[80] - For the three months ended December 31, 2020, $25.1 million of consolidated net earnings were allocated to the redeemable noncontrolling interest (NCI), reflecting Post's 71.2% economic interest in BellRing LLC post-IPO[80] COVID-19 Impact This section discusses the economic disruptions and operational responses related to the COVID-19 pandemic - The COVID-19 pandemic has caused economic disruption and uncertainty, leading the company to implement safety measures, maintain supply chain continuity, and preserve financial liquidity[81] - As of December 31, 2020, liquid and powders sub-categories returned to pre-COVID-19 growth rates, but the bar sub-category continued to experience declines[81] Restructuring Charges This section details the strategic realignment plan and associated restructuring charges initiated by the company - In October 2020, the company initiated a strategic realignment plan, including closing its Dallas office and downsizing its Munich location, with completion expected by the end of fiscal 2021[82] Results of Operations This section analyzes the key drivers and changes in the company's financial performance metrics Key Financial Results (Three Months Ended December 31) | Metric | 2020 (in millions) | 2019 (in millions) | Change ($ in millions) | Change (%) | | :------------------------------------ | :----------------- | :----------------- | :--------- | :--------- | | Net Sales | $282.4 | $244.0 | $38.4 | 16% | | Operating Profit | $47.8 | $49.3 | $(1.5) | (3)% | | Interest expense, net | $12.8 | $11.6 | $(1.2) | (10)% | | Income tax expense | $2.1 | $5.9 | $3.8 | 64% | | Net Earnings Available to Class A Common Stockholders | $7.8 | $6.0 | $1.8 | 30% | Net Sales This section analyzes the factors contributing to changes in the company's net sales - Net sales increased by $38.4 million (16%) to $282.4 million, driven by Premier Protein products (up 17% with 22% volume increase) and Dymatize products (up 16% with 10% volume increase)[85] - Premier Protein's volume growth was due to distribution gains, new product introductions, and increased promotional activity, while Dymatize's growth came from higher club, eCommerce, and mass channel volumes[85] Operating Profit This section examines the drivers behind the changes in the company's operating profit - Operating profit decreased by $1.5 million (3%) to $47.8 million, primarily due to higher net product costs ($6.0 million from unfavorable raw materials and freight) and restructuring costs ($4.7 million)[86] - The decrease was partially offset by higher net sales and lower costs related to the separation from Post ($1.5 million)[86] Interest Expense, Net This section discusses the factors influencing the company's net interest expense - Interest expense, net, increased to $12.8 million from $11.6 million, primarily due to debt issuance in fiscal 2020 and incremental net hedging losses of $0.5 million on interest rate swaps[87] Income Taxes This section explains the changes in the company's effective income tax rate - The effective income tax rate decreased to 6.0% from 15.6%, mainly because the company now accounts for its 28.8% distributive share of BellRing LLC's income post-IPO, compared to 100% prior to the IPO[88] Liquidity and Capital Resources This section assesses the company's ability to generate and manage cash flows for its operational and financial needs - The company expects positive cash flows from operations and believes current cash, operating cash flows, and future credit facilities will be sufficient for working capital, R&D, and other financing needs[90] - Capital expenditures are modest, averaging less than 1% of net sales over the last three fiscal years, with no significant capital expenditures planned for the remainder of fiscal 2021[90] Select Cash Flow Data (Three Months Ended December 31) | Activity | 2020 (in millions) | 2019 (in millions) | | :------------------------------------ | :----------------- | :----------------- | | Operating activities | $23.3 | $(24.9) | | Investing activities | $0.0 | $(0.7) | | Financing activities | $(22.0) | $49.9 | | Net increase in cash and cash equivalents | $2.1 | $24.4 | Operating Activities This section analyzes the cash flows generated from the company's primary business operations - Cash provided by operating activities increased to $23.3 million in 2020 from cash used of $24.9 million in 2019, primarily due to favorable working capital changes of $46.2 million[94] Investing Activities This section details the cash flows related to the acquisition and disposal of long-term assets - Cash used in investing activities decreased by $0.7 million in 2020 compared to 2019, due to a decrease in capital expenditures[95] Financing Activities This section outlines the cash flows from debt, equity, and dividend transactions - In Q1 FY2021, cash used in financing activities was $22.0 million, including $20.0 million drawn from the Revolving Credit Facility, $37.5 million repaid on the Term B Facility, and $3.6 million in net cash transfers to Post[96] - In Q1 FY2020, cash provided by financing activities was $49.9 million, including $686.0 million from Term B Facility, $120.0 million drawn from Revolving Credit Facility, $524.4 million from IPO, and repayments of $1,225.0 million bridge loan and $40.0 million on Revolving Credit Facility[97] Debt Covenants This section discusses the company's compliance with its debt agreement covenants - BellRing LLC is required to maintain a total net leverage ratio not exceeding 6.00 to 1.00 and was in compliance as of December 31, 2020[98] Critical Accounting Policies and Estimates This section highlights the accounting policies and estimates that require significant management judgment - There have been no significant changes to the company's critical accounting policies and estimates since September 30, 2020[101] Recently Issued Accounting Standards This section refers to detailed discussions on recently issued accounting standards and their potential impact - Refer to Note 2 within "Notes to Condensed Consolidated Financial Statements" for a discussion regarding recently issued accounting standards[103] Cautionary Statement on Forward-Looking Statements This section warns readers about the inherent risks and uncertainties associated with forward-looking statements in the report - The report contains forward-looking statements subject to risks and uncertainties, including the impact of the COVID-19 pandemic, dependence on RTD protein shakes, competition, reliance on third-party manufacturers and suppliers, and supply chain disruptions[105] - Other risks include changes in consumer preferences, legal and regulatory factors, acquisition challenges, seasonality, international business risks, customer concentration, litigation, economic downturns, market volatility, intellectual property protection, cybersecurity, goodwill impairment, high leverage, and risks related to the ongoing relationship with Post Holdings[105][107] Item 3. Quantitative and Qualitative Disclosures About Market Risk. This section details the company's exposure to various market risks, including commodity price, foreign currency, and interest rate risks, and assesses the impact of the COVID-19 pandemic on these exposures Commodity Price Risk This section describes the company's exposure to fluctuations in raw material prices and its mitigation strategies - The company is exposed to commodity price risks from raw material purchases and manages these by locking in prices through purchase commitments and attempting to offset cost increases by raising prices to customers[109] Foreign Currency Risk This section outlines the company's exposure to risks arising from foreign currency exchange rate fluctuations - The company is exposed to foreign currency exchange rate fluctuations through Active Nutrition International GmbH, whose functional currency is the Euro[110] Interest Rate Risk This section details the company's exposure to variable interest rates on its debt and hedging strategies - The company's Term B Facility ($636.2 million outstanding) and Revolving Credit Facility ($50.0 million outstanding) bear variable interest rates[112] - A hypothetical 10% increase in interest rates would have an immaterial impact on interest expense and interest paid, considering the impact of interest rate swaps with a notional value of $350.0 million[112][113] Item 4. Controls and Procedures. This section reports on management's evaluation of the effectiveness of the company's disclosure controls and procedures and confirms no significant changes in internal control over financial reporting during the quarter Evaluation of Disclosure Controls and Procedures This section reports on management's assessment of the effectiveness of the company's disclosure controls - Management, including the Executive Chairman, CEO, and CFO, concluded that the company's disclosure controls and procedures were effective as of December 31, 2020[114] Changes in Internal Control Over Financial Reporting This section confirms the absence of significant changes in the company's internal control over financial reporting - There were no significant changes in the company's internal control over financial reporting during the quarter ended December 31, 2020, that materially affected or are reasonably likely to materially affect it[114] PART II. OTHER INFORMATION. This part covers legal proceedings, risk factors, and a list of exhibits filed with the Form 10-Q Item 1. Legal Proceedings. This section refers to Note 17 for detailed information on legal proceedings, including the ongoing Joint Juice litigation, and states the company's disclosure threshold for environmental proceedings - Information on legal proceedings is incorporated by reference from Note 17 of the financial statements[115] - The company discloses environmental proceedings with governmental entities if monetary sanctions are reasonably believed to be $1.0 million or more[115] Item 1A. Risk Factors. This section directs readers to the Annual Report on Form 10-K for a comprehensive list of risk factors, noting that COVID-19 impacts may heighten existing risks - Readers should consider risk factors from the Annual Report on Form 10-K, as these risks could materially and adversely affect the business[116] - The enumerated risks have been or may be heightened, or in some cases manifested, by the impacts of the COVID-19 pandemic[116] Item 6. Exhibits. This section lists the exhibits filed with the Form 10-Q, including corporate documents, certifications, and interactive data files Exhibits Filed with Form 10-Q | Exhibit No. | Description | | :---------- | :---------- | | 3.1 | Amended and Restated Certificate of Incorporation | | 3.2 | Amended and Restated Bylaws | | 4.1 | Form of Class A Common Stock Certificate | | 31.1 | Certification of Robert V. Vitale pursuant to Rule 13a-14(a) | | 31.2 | Certification of Darcy H. Davenport pursuant to Rule 13a-14(a) | | 31.3 | Certification of Paul A. Rode pursuant to Rule 13a-14(a) | | 32.1 | Certification of Robert V. Vitale, Darcy H. Davenport and Paul A. Rode, pursuant to 18 U.S.C. Section 1350 | | 101 | Interactive Data File (Form 10-Q in iXBRL) | | 104 | Cover page from Form 10-Q formatted in iXBRL | SIGNATURES This section provides the official signatures for the Form 10-Q filing - The report was signed by Darcy H. Davenport, President and Chief Executive Officer, on February 5, 2021[122]